ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2011

OR

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________to_________

Commission File Number

000-23115

CTI INDUSTRIES CORPORATION

(Exact name of Registrant as specified in its charter)

Illinois

36-2848943

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification Number)

22160 N. Pepper Road

Lake Barrington, Illinois

60010

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (847) 382-1000

Securities Registered pursuant to sections
12(b) of the Act:

Title of Each Class

Name of Each Exchange on Which Registered

Common Stock, No Par

NASDAQ Capital Market

Securities registered pursuant to Section 12(g) of the Act:
None

Indicate by check mark
if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ð
No þ

Indicate by check mark
if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ð
No þ

Indicate
by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark
whether the Registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes þ No o

Indicate by check mark
if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. þ

Indicate by check
mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate
by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

Based upon the closing
price of $5.25 per share of the Registrant’s Common Stock as reported on NASDAQ Capital Market tier of The NASDAQ Stock Market
on June 30, 2011, the aggregate market value of the voting common stock held by non-affiliates of the Registrant was then approximately
$8,911,000. (The determination of stock ownership by non-affiliates was made solely for the purpose of responding to the requirements
of the Form and the Registrant is not bound by this determination for any other purpose.)

The number of shares
outstanding of the Registrant’s Common Stock as of March 1, 2012 was 3,204,506 (excluding treasury shares).

This annual report
includes both historical and “forward-looking statements” within the meaning of Section 21E of the Securities Exchange
Act of 1934, as amended. We have based these forward-looking statements on our current expectations and projections about future
results. Words such as “may,” “should,” “could,” “would,” “expect,”
“plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,”
“continue,” or similar words are intended to identify forward-looking statements, although not all forward-looking
statements contain these words. Although we believe that our opinions and expectations reflected in the forward-looking statements
are reasonable, we cannot guarantee future results, levels of activity, performance or achievements, and our actual results may
differ substantially from the views and expectations set forth in this annual report. We disclaim any intent or obligation to update
any forward-looking statements after the date of this annual report to conform such statements to actual results or to changes
in our opinions or expectations. These forward-looking statements are affected by factors, risks, uncertainties and assumptions
that we make, including, without limitation, our participation in highly competitive markets, potential changes in the cost or
availability of raw materials, our dependence on a limited number of suppliers, the possible inability to obtain an adequate supply
of raw materials, our reliance on a limited number of key customers, the loss of one or more of our key customers, changing consumer
demands, developments or changes in technology, risks of international operations and political environments, dependence on our
intellectual property, compliance with federal, state or local regulations, restrictions included in the Company’s credit
facility, the availability of funds under the Company’s credit facility, damage to or destruction of one or both of the Company’s
principal plants, our ability to service our indebtedness, our ability to invest in needed plant or equipment.

PART I

Item No. 1 – Description of Business

Business Overview

We are a leading developer, manufacturer
and supplier of innovative flexible film products. We provide value-added design, engineering and production for flexible film
products. We have developed, designed, and produced a number of innovative products utilizing flexible films including: novelty
foil balloons, pouches for food and home storage, specialty films for packaging and unique film products for medical applications.

Flexible Containers for home and consumer use for the storage and preservation
of food and personal items,

Flexible Films for food and other packaging and commercial applications,
and,

Specialty Film Products of unique design for various applications including
for medical uses.

Our design and development services, and
the application of our technical expertise to the development of flexible film products, represent a significant component of our
business activity. We leverage our technology to design and develop proprietary products which we market and sell and which we
develop for our customers. We have been engaged in the business of developing flexible film products for 35 years and have acquired
significant technology and know-how in that time. Presently, we hold 11 patents, and have several patent applications pending,
relating to flexible film products including specific films, zipper closures, valves and other features of these products.

We print, process and convert plastic film
into finished products and we produce latex balloons and novelty items. Our principal manufacturing processes include:

Coating and laminating plastic film. Generally, we adhere polyethylene film to another
film such as nylon or polyester.

Printing plastic film and latex balloons. We print films, both plastic and latex
with a variety of graphics for use as packaging film or for balloons.

Converting printed plastic film to balloons.

Converting plastic film to flexible containers.

Producing latex balloons and other latex novelty items.

We market and sell foil and latex balloons
in the United States and in several other countries. We supply coated, laminated and printed films to a number of companies who
generally convert these films into containers for the packaging of food and other items. We supply flexible containers to companies
who market them to consumers who use them for the storage of food and personal items. We also market containers to and through
retail outlets for use by consumers that include a resealable closure system and a valve permitting the evacuation of air from
the pouch by a small pump device, which we also supply. Commencing in the fourth quarter of 2011, we began marketing vacuum sealing
machines for home use to vacuum seal and store food and household items.

In 1978, we began manufacturing metalized
balloons (sometimes referred to as "foil" balloons), which are balloons made of a base material (usually nylon or polyester)
having vacuum deposited aluminum and polyethylene coatings. These balloons remain buoyant when filled with helium for much longer
periods than latex balloons and permit the printing of graphic designs on the surface. In 1985, we began marketing latex balloons
and, in 1988, we began manufacturing latex balloons. In 1999, we acquired an extrusion coating and laminating machine and began
production of coated and laminated films, which we have produced since that time.

2

During the period from 1976 to 1986 and
from 1996 to the present, we have produced flexible containers for the storage of liquids, food products, household goods and other
items.

We market and sell our foil and latex balloons
and related novelty items directly to retail stores and chains and through distributors, who in turn sell to retail stores and
chains. Our balloon and novelty products are sold to consumers through a wide variety of retail outlets including general merchandise,
discount and drugstore chains, grocery chains, card and gift shops, and party goods stores, as well as through florists and balloon
decorators.

Most of our foil balloons contain printed
characters, designs and social expression messages, such as “Happy Birthday,” “Get Well” and similar items.
For a number of our balloon designs, we obtain licenses for well-known characters and print those characters and messages on our
balloons.

We provide laminated films and printed
films to a number of customers who utilize the film to produce bags or pouches for the packaging of food, liquids and other items.
We also produce finished products – pouches and bags – which are used for a variety of applications, including (i)
as vacuumable pouches for household use in storage of food items, (ii) as vacuumable consumer storage devices for clothing and
other household items, and (iii) custom and medical applications.

In 2011, our revenues from our product
lines, as a percent of total revenues were:

· Novelty Products

69% of revenues

· Film Products

13% of revenues

· Flexible Containers

18% of revenues

We are an Illinois corporation with
our principal offices and plant at 22160 N. Pepper Road, Lake Barrington, Illinois.

Business Strategies

Our essential business strategies are as
follows:

Focus on our Core Assets and Expertise. We have been engaged in the development,
production and sale of film products for 35 years and have developed assets, technology and expertise which, we believe, enable
us to develop, manufacture, market and sell innovative products of high quality within our area of knowledge and expertise. We
plan to focus our efforts on these core assets and areas of expertise – laminated films, printed films, pouches, specialty
film products and film novelty products – to develop new products, to market and sell our products and to build our revenues.

3

Maintain a Focus on Margin Levels and Cost Controls in Order to Establish and
Maintain Profitability. We engage in constant review and effort to control our production, and our selling, general and administrative
expenses in order to establish and enhance profitability.

Develop New Products, Product Improvements and Technologies. We work to develop new products, to improve existing
products and to develop new technologies within our core product areas in order to enhance our competitive position and our
sales. We seek to leverage our technology to develop innovative and proprietary products. In the novelty line, our
development work includes new designs, new character licenses and new product developments. Over the past several years we
have developed new pouch closure systems and valves and new film methods for packaging applications. We have received
eleven patents for these developments and have several patent applications pending. We introduced a line of
resealable pouches with a valve and pump system for household storage and vacuum sealing of food items. In 2011, we
introduced a line of vacuum sealing equipment for the vacuum sealing of pouches for food and household items. We work with
customers to develop custom film products which serve the unique needs or requirements of the customer. We have participated
in the development of, and are now producing and selling, a patient transfer device which is used to move medical patients
from one surface to another.

Develop New Channels of Distribution and New Sales Relationships. In order
to increase sales, we endeavor to develop new channels of distribution and new sales relationships, both for existing and new products.
On February 1, 2008, we entered into a Supply and License Agreement with S.C. Johnson & Son, Inc (“SC Johnson”)
to manufacture and supply to SC Johnson certain home food management products to be sold under the SC Johnson ZipLoc®
brand. In February 2011, SC Johnson renewed this agreement for an additional two-year term commencing on July 1, 2011. During 2009
and 2010, we developed new distributors and customers for our pouch and novelty products in Europe, Mexico, Latin America, Australia
and New Zealand, expanding the scope and level of our international sales and activities. During 2010, we established an office
and warehouse in Germany to support the extension of our sales and fulfillment activities in Europe. During 2011, we entered into
a Trademark License Agreement with SC Johnson under which SC Johnson licensed our company to use the ZipLoc® brand for vacuum
sealing machines and pouches for home use with vacuum sealing machines to seal and store food and household items, and we have
introduced and commenced the marketing and sale of these machines and pouches.

4

Enhance Our Productive Capacity. We invest in new plant and equipment when
appropriate to expand the range and volume of products we produce. During 2008 and 2009, we acquired, installed and commenced operation
of equipment which enables us to produce in the range of 60 million pouches annually. During 2010 and 2011, we designed, assembled
and installed latex balloon production equipment which has enhanced our production capacity for latex balloons by approximately
70%.

Products

Foil Balloons. We have designed,
produced and sold foil balloons since 1979 and, we believe, are the second largest manufacturer of foil balloons in the United
States. Currently, we produce about 900 foil balloon designs, in different shapes and sizes, including the following:

Superloons® - 18" foil balloons in round or heart shape, generally
made to be filled with helium and remain buoyant for long periods. This is the predominant foil balloon size.

Ultraloons® - 31" jumbo foil balloons made to be filled with
helium and remain buoyant.

Miniloons®- 9" foil balloons made to be air-filled and sold
on holder-sticks or for use in decorations.

Card-B-Loons®- 4 ½" air-filled foil balloons, often sold
on a stick, used in floral arrangements or with a container of candy.

Shape-A-Loons® - “18 to 48” shaped foil balloons made
to be filled with helium.

Minishapes - 11” to 16” small shaped foil balloons designed to be air
filled and sold on sticks as toys or inflated characters.

Balloon JamzTM - 20” to 40” round and shaped foil balloons
which emit and amplify sound through a speaker attached to the balloon.

In addition to size and shape, a principal
element of the Company's foil balloon products is the printed design or message contained on the balloon. These designs include
figures and licensed characters many of which are well known. We maintain licenses for several well-known characters.

Latex Balloons. Through our majority-owned
subsidiary in Guadalajara, Mexico, Flexo Universal, S.A. de C.V. (“Flexo Universal”), we manufacture latex balloons
in 11 shapes and 46 colors. These balloons are marketed under the name Partyloons®. We also manufacture toy balloon
products including punch balls, water bombs and "Animal Twisties."

5

Packaging Films and Custom Film Products.
We produce and sell films that are utilized for the packaging of various products, principally food products. We laminate, extrusion
coat and print films and sell them to customers who utilize the films for packaging applications. Our customers generally use these
film products to convert them to bags or pouches for the packaging of food and other products. We develop and produce for customers
unique products composed of flexible film, including products for medical applications.

Pouches and Bags. We produce a variety
of completed film products, generally in the form of a bag or pouch. These products include (i) valved, resealable pouches for
storage of household items, (ii) vacuum sealable bags for food storage, and (iii) resealable, valved bags for storage and vacuum
sealing of food items in the household. During 2008, we introduced a line of resealable, valved bags for storage and vacuum sealing
of food items in the household. These storage bags function with a small hand or powered pump to evacuate air when the bag is sealed.
This product line is marketed under the brand ZipVac®. We also produce a line of resealable, valved bags for SC
Johnson which they market under their ZipLoc® brand. For several years, we have produced and marketed open-top pouches
for use with vacuum sealing machines to vacuum seal and store food and household items. We now produce and market such pouches
under the ZipLoc® brand and also market vacuum sealing machines, produced for us, under the ZipLoc™
brand, which utilize these vacuum sealing pouches.

Markets

Foil
Balloons

The foil balloon came into existence in
the late 1970s. During the 1980s, the market for foil balloons grew rapidly. Initially, the product was sold principally to individual
vendors, small retail outlets and at fairs, amusement parks, shopping centers and other outdoor facilities and functions. Foil
balloons remain buoyant when filled with helium for extended periods of time and they permit the printing and display of graphics
and messages. As a result, the product has significant appeal as a novelty and message item. Foil balloons became part of the "social
expression" industry, carrying graphics designs, characters and messages like greeting cards. In the mid-1980s, we and other
participants in the market began licensing character and cartoon images for printing on the balloons and directed marketing of
the balloons to retail outlets including grocery, general merchandise, discount and drug store chains, card and gift shops, party
goods stores as well as florists and balloon decorators. These outlets now represent the principal means for the sale of foil balloons
throughout the United States and in a number of other countries, although “vendors” remain a significant means of distribution
in a number of areas.

Foil balloons are now sold in virtually
every region of the world. The United States, however, remains the largest market for these products.

6

Foil balloons are sold in the United States
and foreign countries directly by producers to retail outlets and through distributors and wholesalers. Often the sale of foil
balloons by the wholesalers/distributors is accompanied by related products including latex balloons, floral supplies, candy containers,
mugs, plush toys, baskets and a variety of party goods.

Latex Balloons

For a number of years, latex balloons and
related novelty/toy latex items have been marketed and sold throughout the United States and in most other countries. Latex balloons
are sold as novelty/toy items, for decorative purposes, as part of floral designs and as party goods and favors. In addition to
standard size and shape balloons, inflatable latex items include punch balls, water bombs, balloons to be twisted into shapes,
and other specialty designs. Often, latex balloons included printed messages or designs.

Latex balloons are sold principally in
retail outlets, including party goods stores, general merchandise stores, discount chains, gift stores and drugstore chains. Latex
balloons are also purchased by balloon decorators and floral outlets for use in decorative or floral designs.

Printed latex balloons are sold both in
retail outlets and for balloon decoration purposes including floral designs. "Toy" balloons include novelty balloons
sold in toy departments or stores, punch balls, water bombs and other specialty designs.

Latex balloons are sold both through distributors
and directly to retail outlets by the producers.

Printed
and Specialty Films

The industry and market for printed and
specialty films is fragmented and includes many participants. There are hundreds of manufacturers of printed and specialty film
products in the United States and in other markets. In many cases, companies who provide food and other products in film packages
also produce or process the films used for their packages. The market for the Company's film products consists principally of companies
who utilize the films for the packaging of their products, including food products and other items, usually by converting the film
to a flexible container. In addition to the packaging of food products, flexible containers are used for medical purposes (such
as colostomy bags, containers for saline solution and other items), "dunnage" (to cushion products being packaged), storage
of personal and household items and other purposes.

Flexible Containers/Pouches

The market for flexible containers and
pouches is large and diverse. Many companies engaged in the production of food items package their products in flexible containers
or pouches, and, therefore, represent a market for these containers. Many of these companies purchase film – often printed
film – and convert the film to pouches or packages at their own facilities while others purchase completed containers from
suppliers.

7

Flexible containers and pouches are sold
and utilized in the consumer market in numerous forms. They include simple open-top plastic bags, resealable bags and zippered
bags. The market also includes containers and pouches of special design or purpose, including vacuumable bags for storage of food
or household items, medical bags, or commercial uses.

Marketing, Sales and Distribution

Balloon Products

We market and sell our foil balloon, latex
balloon and related novelty products throughout the United States and in a number of other countries. We maintain a marketing,
sales and support staff of five individuals and a customer service department of four individuals in the United States. Sales in
the United Kingdom are conducted by CTI Balloons, the Company's subsidiary located in Rugby, England. In January 2010, we commenced
the sale of balloon products through a facility near Frankfurt, Germany. Flexo Universal conducts sales and marketing activities
for the sale of balloon products in Mexico, Latin America, and certain other markets. Sales in other foreign countries are made
generally to distributors in those countries and are managed at the Company's principal offices.

We sell and distribute our balloon products
(i) by our employed staff of sales and customer service personnel in the United States, Mexico, the UK and Germany, (ii) through
a network of distributors and wholesalers in the United States, Mexico, the UK and Europe, (iii) through several groups of independent
sales representatives, and (iv) to selected retail chains. The distributors and wholesalers are generally engaged principally in
the sale of balloons and related products (including such items as plush toys, mugs, containers, floral supplies and other items)
and sell balloons and related products to retail outlets including grocery, general merchandise and drug store chains, card and
gift shops, party goods stores as well as florists and balloon decorators.

Our largest customer for balloons during
2011 was Dollar Tree Stores. Sales to this chain in 2011 represented $13,584,000 or approximately 28.8% of our consolidated net
sales.

We engage in a variety of advertising and
promotional activities to promote the sale of our balloon products. Each year, we produce a complete catalog of our balloon products,
and also prepare various flyers and brochures for special or seasonal products, which we disseminate to thousands of customers,
potential customers and others. We participate in several trade shows for the gift, novelty, balloon and other industries and advertise
in several trade and other publications.

8

Printed and Specialty Films

We market and sell printed and laminated
films directly and through independent sales representatives throughout the United States. We sell laminated and printed films
to companies that utilize these films to produce packaging for a variety of products, including food products, in both solid and
liquid form, such as cola syrup, coffee, juices and other items. We seek to identify and maintain customer relationships in which
we provide added value in the form of technology or systems. Our largest customer for film products is Rapak, L.L.C. (“Rapak”)
to whom we provide a patented embossed film, as well as other film products. During 2011, our sales to Rapak totaled $5,773,000,
representing 12.2% of our consolidated net sales. Under our agreement with Rapak, which continues through October 31, 2012,
Rapak is committed to purchase at least 75% of its requirements for embossed film from us.

Flexible Containers/Pouches

We market flexible containers and pouches
to various companies for commercial packaging purposes and we market lines of consumer storage packages both to a principal customer
and to retail chains and outlets.

On February 1, 2008, we entered into a
License and Supply Agreement with SC Johnson. The agreement provides for the Company to manufacture and sell to SC Johnson (or
its designee, Goodwill Commercial Services, Inc.) certain home food management products to be sold under the SC Johnson ZipLoc®
brand. The agreement is for a term initially expiring on June 30, 2011 and provides for two renewal terms of two years each at
the option of SC Johnson. In February 2011, SC Johnson renewed the agreement for an additional two-year term commencing on July
1, 2011.

During 2005, we introduced a line of universal
vacuumable bags for household storage of food products. These bags are designed to be used with existing vacuum and sealing devices.
We market these bags through various retail channels and introduced this line of products to additional retail chains in 2011.

On December 14, 2011, the Company entered
into a Trademark License Agreement with SC Johnson under which the Company is licensed to manufacture and sell a line of vacuum
sealing machines and pouches under the ZipLoc™ brand and trademark. The agreement is for a three year term expiring on December
31, 2014. The licensed product line includes vacuum sealing machines manufactured for the Company and pouches manufactured by the
Company for use in the home to vacuum seal food items to preserve freshness and help prevent freezer burn.

During 2007, we introduced a line of re-sealable
pouches incorporating a valve permitting the evacuation of air from the sealed pouch by use of a hand pump supplied with the pouches.
This line of products is marketed under the brand name ZipVac®. We market this line of products to various distributors
and retail outlets.

9

Production and Operations

We conduct our operations at our facilities:
(i) our headquarters, offices and plant in Lake Barrington, Illinois, consisting of a total of approximately 75,000 square feet
of office, production and warehouse space, (ii) a warehouse in Elgin, Illinois consisting of approximately 30,000 square feet,
(iii) a plant, office and warehouse in Guadalajara, Mexico, consisting of approximately 73,000 square feet of office, warehouse
and production space, (iv) an office and warehouse facility in Rugby, England, consisting of approximately 9,000 square feet of
space, and (v) an office and warehouse facility in Heusenstamm, Germany, consisting of approximately 3,000 square feet.

We conduct production operations at our
plants in Lake Barrington, Illinois and Guadalajara, Mexico. At our plants, our production operations include (i) lamination and
extrusion coating of films, (ii) slitting of film rolls, (iii) printing on film and on latex balloons, (iv) converting of film
to completed products including balloons, flexible containers and pouches, and (v) production of latex balloon products. We perform
all of the lamination, extrusion coating and slitting activities in our Lake Barrington, Illinois plant and produce all of our
latex balloon products at our Guadalajara, Mexico plant. We print films in Lake Barrington, Illinois and we print latex balloons
in Guadalajara, Mexico.

We warehouse raw materials at our plants
in Lake Barrington, Illinois and Guadalajara, Mexico and we warehouse finished goods at our facilities in Lake Barrington, Illinois;
Elgin, Illinois; Guadalajara, Mexico; Rugby, England and Heusenstamm, Germany. We maintain customer service and fulfillment operations
at each of our warehouse locations. We conduct sales operations for the United States and for all other markets, except those handled
by our Mexico, Germany and England facilities, at the Lake Barrington, Illinois facility. Sales for Mexico and Latin America are
handled at our Guadalajara, Mexico facility; sales for the United Kingdom are handled at our Rugby, England facility; sales for
Europe are conducted from our facility in Heusenstamm, Germany.

We maintain a graphic arts and development
department at our Lake Barrington, Illinois facility which designs our balloon products and graphics. Our creative department operates
a networked, computerized graphic arts system for the production of these designs and of printed materials including catalogues,
advertisements and other promotional materials.

We conduct administrative and accounting
functions at our headquarters in Lake Barrington, Illinois and at our facilities in Guadalajara, Mexico and Rugby, England.

Raw Materials

The principal raw materials we use in manufacturing
our products are (i) petroleum or natural gas-based films, (ii) petroleum or natural gas-based resin, (iii) latex, and (iv) printing
inks. The cost of raw materials represents a significant portion of the total cost of our products, with the result that fluctuations
in the cost of raw materials has a material effect on our profitability. The cost of our raw materials represented approximately
47% of our net revenues in 2011 compared to 45% in 2010. During the past several years, we have experienced significant fluctuations
in the cost of these raw materials. We do not have any long-term agreements for the supply of raw materials and may experience
wide fluctuations in the cost of raw materials in the future. Further, although we have been able to obtain adequate supplies of
raw materials in the past, there can be no assurance that we will be able to obtain adequate supplies of one or more of our raw
materials in the future.

10

A principal raw material for our latex
balloon is natural latex. During the latter part of 2010 and into 2011, the price of natural latex increased substantially from
a low in the first quarter 2010 of approximately $2.99 per kilo to a high in the first half of 2011 to approximately $5.64 per
kilo. We were unable to increase the selling price of our latex balloons sufficiently to reflect this increase in the cost of latex
and, as a result, during much of 2011, our margins on the sale of latex balloons decreased. The price of natural latex has declined
in the second half of 2011. However, the price of natural latex remains volatile and we may not be able to increase the selling
price of our latex balloon products in the future to offset fully increases in the cost of natural latex.

Many of the foil balloons we produce and
sell are intended to be filled with helium in order to be buoyant. Over the past year, the price of helium has increased substantially
and the availability of helium has declined. The increase in the price of helium and its lack of availability may adversely affect
our sales of foil balloons.

Information Technology Systems

Our corporate headquarters in Lake Barrington,
Illinois and our warehouse facility in Elgin, Illinois are serviced by a PC-based local area network. We connect the facilities
via a high speed T1 line that carries both voice and data communications. Access to the network is available to all appropriate
employees but is secured through four Microsoft servers running Active Directory authentication. The network allows us to leverage
printing resources, create shared file areas for cross-departmental functions and allows for a single source backup of critical
business files. On the network we run Macola financial system software. Macola is a modular software system. We presently use the
general ledger, order entry, inventory management, purchase order, manufacturing costing, controls and inventory controls, electronic
data exchange and custom report writing modules of that system. Internal and external employee communications are handled by industry
standard Microsoft Exchange email, allowing us to communicate with customers and vendors all over the world. We also provide a
secure, firewall protected, load balanced and redundant T1 and cable internet connection allowing employees to use e-mail, research
issues, support customers and securely move data.

At each of our Mexico, England and Germany
facilities, we operate server computers and local area networks, accessible to employees at those facilities. At each of those
facilities, we operate separate integrated financial, order entry and inventory management systems.

11

Competition

The balloon and novelty industry is highly
competitive, with numerous competitors. We believe there are presently six principal manufacturers of foil balloons whose products
are sold in the United States including Anagram International, Inc., Pioneer Balloon Company, Convertidora International S.A. de
C.V., Barton Enterprises Inc., and Betallic, LLC. Several companies market and sell foil balloons designed by them and manufactured
by others for them.

We believe there are approximately five
manufacturers of latex balloons whose products are sold in the United States and numerous others whose products are sold in other
countries.

We also compete with other manufacturers
of foil and latex balloons in Europe, Latin America and Asia.

The market for films, packaging, flexible
containers and custom products is fragmented, and competition in this area is difficult to gauge. However, there are numerous participants
in this market and the Company can expect to experience intense quality and price competition.

Many of these companies offer products
and services that are the same or similar to those offered by us and our ability to compete depends on many factors within and
outside our control. There are a number of well-established competitors in each of our product lines, several of which possess
substantially greater financial, marketing and technical resources and have established extensive, direct and indirect channels
of distribution for their products and services. As a result, such competitors may be able to respond more quickly to new developments
and changes in customer requirements, or devote greater resources to the development, promotion and sale of their products and
services than we can. Competitive pressures include, among other things, price competition, new designs and product development
and copyright licensing.

Patents, Trademarks and Copyrights

We have developed or acquired a number
of intellectual property rights which we believe are significant to our business.

Copyright Licenses. We maintain
licenses on certain popular characters and designs for our balloon products. We presently maintain a number of licenses and produce
balloon designs utilizing the characters or designs covered by the licenses. Licenses are generally maintained for a one or two-year
term, although the Company has maintained long term relationships with several of its licensors.

12

Trademarks. We own 9 registered
trademarks in the United States relating to our balloon products. Many of these trademarks are registered in foreign countries,
principally in the European Union.

Patent Rights. We own, or have license
rights under, or have applied for, patents related to our balloon products, certain film products and certain flexible container
products. These include (i) ownership of two patents, relating to self-sealing valves for foil balloons and methods of making balloons
with such valves, (ii) several foil balloon design patents, (iii) patents and applications related to the design and structure
of, and method of, inserting and affixing, zipper-closure systems in a bag, (iv) patents related to one-way valves for pouches,
(v) a patent related to methods of embossing film and utilizing such film to produce pouches with fitments, and (vi) patent applications
related to vacuumable storage bags with fitments.

Research and Development

We maintain a product development and research
department of seven individuals for the development or identification of new products, product components and sources of supply.
Research and development includes (i) creative product development, (ii) creative marketing, and (iii) engineering development.
During each of the fiscal years ended December 31, 2011 and 2010, we estimate that the total amount spent on research and development
activities was approximately $728,000 and $443,000, respectively.

Employees

As of December 31, 2011, the Company had
152 full-time employees in the United States, of whom 20 are executive or supervisory, 5 are in sales, 104 are in manufacturing
or warehouse functions and 17 are clerical. As of that same date, we had 18 full-time employees in England, of whom 3 are executive
or supervisory, 3 are in sales, 10 are in warehousing and 2 are clerical. At Flexo Universal, our Mexico subsidiary, as of December
31, 2011, we had 299 full-time employees, of whom 4 are executive or supervisory, 3 are in sales, 270 are in manufacturing and
22 are clerical. As of December 31, 2011, the Company had 3 full-time employees in Germany, of whom one is executive or supervisory,
one is in warehousing and one is clerical. The Company is not a party to any collective bargaining agreement in the United States,
has not experienced any work stoppages and believes that its relationship with its employees is satisfactory.

Regulatory Matters

Our manufacturing operations in the United
States are subject to the U.S. Occupational Safety and Health Act ("OSHA"). We believe we are in material compliance
with OSHA. The Company generates liquid, gaseous and solid waste materials in its operations in Lake Barrington, Illinois and the
generation, emission or disposal of such waste materials are, or may be, subject to various federal, state and local laws and regulations
regarding the generation, emission or disposal of waste materials. We believe we are in material compliance with applicable environmental
rules and regulations. Several states have enacted laws limiting or restricting the release of helium filled foil balloons. We
do not believe such legislation will have any material effect on our operations.

13

International Operations

We sell balloon products in a number of
countries outside of the United States. Our facility and personnel in Rugby, England handle the sales of these products in the
United Kingdom. Our facility and personnel in Guadalajara, Mexico handle the sales of these products in Mexico and Latin America.
In January 2010, we commenced the sale of novelty products in Europe through a facility in Heusenstamm, Germany. In other countries,
we sell balloon products through distributors located in those countries. We conduct production, packaging, warehousing and sales
operations in Mexico. We conduct warehousing and sales operations in the United Kingdom and Germany. We rely, and are dependent,
on our operations in Mexico for the supply of latex balloons in the United States, Mexico, Europe and other markets. Interruption
of that supply would have a materially adverse effect on the business of the Company.

Our domestic and international sales to
outside customers and assets by area over the period 2010-2011 have been as follows:

United States

United Kingdom (UK)

Europe (Excluding UK)

Mexico

Consolidated

Year ended 12/31/11

Sales to outside customers

$

34,657,000

$

1,838,000

$

376,000

$

10,300,000

$

47,171,000

Total Assets

$

25,302,000

$

734,000

$

464,000

$

7,116,000

$

33,616,000

United States

United Kingdom (UK)

Europe (Excluding UK)

Mexico

Consolidated

Year ended 12/31/10

Sales to outside customers

$

36,721,000

$

2,387,000

$

108,000

$

8,532,000

$

47,748,000

Total Assets

$

24,711,000

$

977,000

$

220,000

$

6,953,000

$

32,861,000

Item
No. 1B – Unresolved Staff Comments

As of the filing of this Annual report
on Form 10-K, we had no unresolved comments from the staff of the Securities and Exchange Commission that were received not less
than 180 days before the end of our 2011 fiscal year.

Item No. 2 – Properties

We own our principal plant and offices
located in Lake Barrington, Illinois, approximately 45 miles northwest of Chicago, Illinois. The facility includes approximately
75,000 square feet of office, manufacturing and warehouse space. This facility is subject to a mortgage loan with an initial principal
of $2,300,000, having a term of 3 years, with payments amortized over 25 years.

14

In October 2011, we entered into a lease
agreement, expiring on December 31, 2012, to rent approximately 30,000 square feet of warehouse space in Elgin, Illinois at a cost
of $20,000 per month.

In December 2011, CTI Balloons, Ltd. entered
into a 3-year lease agreement for approximately 9,000 square feet of office and warehouse space in Rugby, England at a cost of
$5,000 per month. This facility is utilized to warehouse balloon products and to manage and service the Company's operations in
England.

In August 2011, Flexo Universal entered
into a 5-year lease agreement, expiring July 31, 2016, for the lease of approximately 73,000 square feet of manufacturing, warehouse
and office space in Guadalajara, Mexico at a cost of $30,000 per month.

In September 2010, CTI Europe GmbH entered
into a 3-year lease agreement for a facility located in Heusenstamm, Germany located approximately 15 miles from Frankfurt International
Airport. The facility includes approximately 3,000 square feet of office and warehouse space at a cost of $2,000 per month.

We believe that our properties have been
adequately maintained, are in generally good condition and are suitable for our business as presently conducted. We believe our
existing facilities provide sufficient production capacity for our present needs and for our presently anticipated needs in the
foreseeable future. We also believe that, with respect to leased properties, upon the expiration of our current leases, we will
be able to either secure renewal terms or to enter into leases for alternative locations at market terms.

Item No. 3 – Legal Proceedings

The Company may be party to certain lawsuits
or claims arising in the normal course of business. The ultimate outcome of these matters is unknown but, in the opinion of management,
we do not believe any of these proceedings will have, individually or in the aggregate, a material adverse effect upon our financial
condition, cash flows or future results of operation.

The Company's Common Stock was admitted
to trading on the NASDAQ SmallCap Market (now the NASDAQ Capital Market) under the symbol CTIB on November 5, 1997.

15

The high and low sales prices for the last
eight fiscal quarters according to the NASDAQ Stock Market's Stock Price History Report, were:

High

Low

January 1, 2010 to March 31, 2010

$

4.70

$

2.26

April 1, 2010 to June 30, 2010

7.60

2.77

July 1, 2010 to September 30, 2010

9.05

4.87

October 1, 2010 to December 31, 2010

9.75

5.03

January 1, 2011 to March 31, 2011

6.90

4.75

April 1, 2011 to June 30, 2011

5.98

4.33

July 1, 2011 to September 30, 2011

5.50

3.31

October 1, 2011 to December 31, 2011

5.72

3.80

As of December 31, 2011 there were approximately
43 holders of record of the Company’s Common Stock. The Company believes that its total number of beneficial owners of common
stock of the Company exceeds 670.

During 2011, the Company declared and paid
dividends of five cents ($0.05) per share on the Company’s outstanding common stock to shareholders of record on July 18,
2011. The total amount of the dividends paid on July 28, 2011 was $158,000. Under the terms of its current loan agreement, the
amount of dividends the Company may pay is limited by the terms of the financial covenants our Credit Agreement with Harris N.A.

Sales of Unregistered Securities

On February 1, 2006, two principal officers
and shareholders of our Company each loaned to our Company the sum of $500,000 in exchange for (i) Promissory Notes due on demand
and bearing interest at the rate of 2% per annum in excess of the prime rate determined quarterly and (ii) five year Warrants to
purchase up to 151,515 shares of common stock of the Company at the price of $3.30 per share (110% of the closing market price
on the day preceding the date of the loans). On May 28, 2010, each of these officer/shareholders exercised the Warrants to purchase
151,515 shares each of common stock of the Company in exchange for cancellation of indebtedness of the Company to them in the amount
of the purchase price for the shares.

On October 1, 2008, the Company issued
warrants to two principal officers and shareholders of the Company to purchase up to 20,000 shares each of common stock of the
Company at the price of $4.80 per share (the market price of the common stock on the date of the issuance of the warrants) in consideration
of the personal guarantees by each of up to $2 million in principal amount of the bank debt of the Company. On May 28, 2010, these
warrants were exercised and the shares issued.

In separate transactions, on December 29,
2011, John Schwan and Stephen Merrick purchased 42,105 and 21,053 shares, respectively, of common stock of the Company at $4.75
per share. The closing price of the stock that day on the NASDAQ Capital Market was $4.44 per share. Both of Mr. Schwan and Mr.
Merrick are officers, directors and principal shareholders of the Company.

16

An exemption from registration for each
of such issuances of shares of common stock of the Company is claimed under Section 4(2) of the Securities Act of 1933 by reason
of the facts that such shares were purchased by sophisticated investors who are officers of the Company, such shares were purchased
for investment and not with a view to the resale or distribution thereof and transfer of such shares is restricted.

The Company produces film products for
novelty, packaging and container and custom product applications. These products include foil balloons, latex balloons and related
latex toy products, films for packaging applications, flexible containers for packaging and storage applications and custom film
products. We produce all of our film products for packaging and container applications at our facilities in Lake Barrington, Illinois.
We produce all of our latex balloons and latex products at our facility in Guadalajara, Mexico. Substantially all of our film products
for packaging applications and flexible containers for packaging and storage are sold to customers in the United States. We market
and sell our novelty items – principally foil balloons and latex balloons – in the United States, Mexico, the United
Kingdom and a number of additional countries.

Our revenues from each of our product categories
in each of the past two years have been as follows:

(000 Omitted)

$

% of

$

% of

Product Category

2011

Net Sales

2010

Net Sales

Metalized Balloons

21,443

45.4%

21,915

45.9%

Film Products

6,259

13.3%

7,428

15.5%

Pouches

8,311

17.6%

8,676

18.2%

Latex Balloons

10,202

21.7%

8,589

18.0%

Other

956

2.0%

1,140

2.4%

Total

47,171

100.0%

47,748

100.0%

Our primary expenses include the cost of
products sold and selling, general and administrative expenses.

17

Cost of products sold primarily consists
of expenses related to raw materials, labor, quality control and overhead expenses such as supervisory labor, depreciation, utilities
expense and facilities expense directly associated with production of our products, as well as shipping costs relating to the shipment
of products to customers. Cost of products sold is impacted by the cost of the raw materials used in our products, the cost of
shipping, along with our efficiency in managing the production of our products.

Selling, general and administrative expenses
include the compensation and benefits paid to our employees, all other selling expenses, marketing, promotional expenses, travel
and other corporate administrative expenses. These other corporate administrative expenses include professional fees, depreciation
of equipment and facilities utilized in administration, occupancy costs, communication costs and other similar operating expenses.
Selling, general and administrative expenses can be affected by a number of factors, including staffing levels and the cost of
providing competitive salaries and benefits, the cost of regulatory compliance and other administrative costs.

Purchases by a limited number of customers
represent a significant portion of our total revenues. In 2011, sales to our top 10 customers represented 70.9% of net revenues.
During 2011, there were two customers to whom our sales represented more than 10% of net revenues. Our principal customers sales
for 2011 and 2010 were:

Customer

Product

2011 Sales

% of 2011 Revenues

2010 Sales

% of 2010 Revenues

Dollar Tree Stores

Balloons

$13,584,000

28.8%

$13,722,000

28.7%

Rapak L.L.C

Films

$5,773,000

12.2%

$6,766,000

14.2%

The loss of one or more of these principal
customers, or a significant reduction in purchases by one or more of them, could have a material adverse effect on our business.

Except as previously described (see page
9), we generally do not have agreements with our customers under which customers are obligated to purchase any specific or minimum
amount of product from us.

Results of Operations

The following table sets forth selected
results of our operations expressed as a percentage of net sales for the years ended December 31, 2011 and 2010. Our results of
operations for the periods described below are not necessarily indicative of results of operations for future periods.

18

Year ended December 31,

2011

2010

Net sales

100.0%

100.0%

Costs and expenses:

Cost of products sold

80.5

77.8

Operating Expenses

16.5

15.8

Income from operations

3.0

6.4

Interest expense

(1.7)

(2.0)

Other income

0.0

0.0

Income before income taxes

1.5

4.4

Provision for income taxes

0.7

0.7

Net profit

1.0%

3.7%

Year Ended December 31, 2011 Compared
to Year Ended December 31, 2010

Net Sales

For the fiscal year ended December 31,
2011, consolidated net sales from the sale of all products were $47,171,000 compared to consolidated net sales of $47,748,000 for
the year ended December 31, 2010, a decrease of 1.2%.

Sales of foil balloons were $21,915,000
in 2010 and $21,443,000 in 2011. Of our total foil balloon sales in 2011, $13,165,000 were to Dollar Tree. The remaining sales
were made to over 500 customers including distributors and retail stores or chains in the United States, Mexico, the United Kingdom,
Europe and Latin America. Sales to these other customers increased from $8,193,000 in 2010 to $8,278,000 in 2011.

Sales of film products decreased by 15.7%
from $7,428,000 in 2010 to $6,259,000 in 2011. This decrease includes a decrease in sales to Rapak, L.L.C. of $993,000. In addition
to Rapak, film sales included sales to 12 other customers including sales of a medical bag device.

Sales of pouch products decreased by 4.2%
from $8,676,000 in 2010 to $8,311,000 in 2011. This decrease is attributable principally to a decrease in sales of our zippered
vacuumable pouch products. Sales of our universal vacuumable pouch products increased during the year.

Sales of latex balloons increased by 18.8%
from $8,589,000 in 2010 to $10,202,000 in 2011. The increase is attributable to an increase in latex sales to a variety of customers
in the United States, Mexico, Latin America and Europe.

19

Cost of Sales

Cost of sales increased from 77.8% of sales
in 2010 to 80.5% of sales in 2011. A mix of factors affected cost of goods including an increase in the cost of raw materials from
45% of sales in 2010 to 47% of sales in 2011. A significant factor in the increase was the increase in the price of raw material
latex which we experienced in 2011. During 2010, our average price per kilo of latex was $3.73. During 2011, the average price
was $5.07. We purchased 1,158,000 kilos of latex in 2011 so the increase in cost we incurred, over 2010 price levels was approximately
$1,551,000. Other factors which affected gross margin in 2011 included (i) an increase in factory overhead of approximately 7.6%,
and (ii) price increases of films and other raw materials of approximately 15%. We did increase the selling price of latex balloons
and certain other items during 2011. However, the increases were not sufficient in time or amount to offset fully these increases
in costs.

In the fourth quarter 2011, prices of certain
raw materials, particularly latex, began to moderate and, in the fourth quarter, our cost of sales declined to 78.3% of fourth
quarter sales.

General and Administrative Expenses

General and administrative expenses increased
from $4,921,000 in 2010 or 10.3% of net sales to $5,279,000 or 11.2% of net sales in 2011. This increase is attributable to an
increase in administrative expenses at our foreign subsidiaries including Flexo, CTI Balloons, and CTI Europe.

Operating expenses (including administrative,
selling and advertising expenses) increased in the fourth quarter by $283,000 from $1,747,000 in the fourth quarter 2010 to $2,030,000
in the fourth quarter 2011. This increase included $72,000 in selling, advertising, and administrative expenses related to the
project associated with the Trademark License agreement with SC Johnson, costs related to the initiation of new accounts, commission
payouts, bonus accrual, and administrative expenses at Flexo Universal.

Selling

Selling expenses decreased from $915,000
or 1.9% of sales in 2010 to $911,000 or 1.9% of sales in 2011.

Advertising and Marketing

Advertising and marketing expenses decreased
from $1,720,000 or 3.6% of sales in 2010 to $1,579,000 or 3.3% of sales in 2011.

20

Other Income or Expense

During 2011, we incurred net interest expense
of $773,000 compared to net interest expense of $919,000 during 2010.

During 2011, we realized a foreign currency
gain in the amount of $38,000 compared to foreign currency loss in 2010 of $31,000.

Net Income or Loss

During 2011, we had net income of
$484,000 compared to net income of $1,827,000 in 2010. The decrease in income is attributable to the reduction of margin and
the increase in administrative expenses. In 2010, the Company determined it was more likely than not that the Company
would generate taxable income thus remaining valuation allowance on the deferred tax assets was eliminated. The effect was a
reduction to income tax expense and therefore an increase in net income. Going forward, the Company expects to recognize a
higher level of income tax expense for financial statement purposes.

Income Taxes

In 2011, the Company recognized income
tax expense, on a consolidated basis, of $319,000. This income tax expense is composed of an income tax expense in the United States
of $244,000, an income tax benefit realized by CTI Balloons, our United Kingdom subsidiary, in the amount of $54,000, an income
tax benefit realized by CTI Europe, our Germany subsidiary, in the amount of $156,000 and an income tax expense by Flexo Universal,
our Mexico subsidiary, in the amount of $285,000. In 2010, the Company recognized income tax expense, on a consolidated basis,
of $343,000. This income tax expense is composed of an income tax expense in the United States of $166,000, an income tax benefit
realized by CTI Balloons, our United Kingdom subsidiary, in the amount of $5,000, an income tax benefit realized by CTI Europe,
our Germany subsidiary, in the amount of $73,000 and an income tax expense by Flexo Universal, our Mexico subsidiary, in the amount
of $255,000. In 2010, in the United States, the Company did recognize income tax expense, representing the amount of the reduction
in its deferred tax asset account arising from its U.S. income for the year, but will not be required to pay tax for 2010 or 2011
by reason of the balance of its tax loss carryforward account. During the fourth quarter 2010, the Company utilized the remainder
of the reserve on its deferred tax asset. The amount of the valuation allowance realized in 2010 was $529,000.

We anticipate continued increases in inventory
levels during 2012 as we produce and acquire inventory for our new vacuum machine and pouch project.

Cash Used in Investing Activities
During fiscal 2011, cash used in investing activities amounted to $1,107,000 compared to cash used in investing activities during
fiscal 2010 of $1,965,000. Cash used in investing activities was principally for maintenance expenditures and for the purchase
of production equipment. Although we do not presently have any commitments for capital expenditures, we do anticipate that we will
incur some level of capital expenditures in 2012 in excess of maintenance capital expenditure levels of approximately $500,000.

Cash Provided by Financing Activities
During fiscal 2011, cash used in financing activities amounted to $135,000, compared to cash used in financing activities of $1,375,000
during fiscal 2010. During 2011, we repaid long-term debt of $506,000 and reduced by $208,000 the amount outstanding under our
revolving line of credit.

On April 29, 2010, we entered into a Credit
Agreement and associated documents with Harris N.A. (“Harris”) under which Harris agreed to extend to the Company a
credit facility in the aggregate amount of $14,417,000. The facility includes (i) a Revolving Credit providing for maximum advances
to the Company, and letters of credit, based upon the level of availability measured by levels of eligible receivables and inventory
of the Company of $9,000,000, (ii) an Equipment Loan of up to $2,500,000 providing for loans for the purchase of equipment, (iii)
a Mortgage Loan of $2,333,350, and (iv) a Term Loan in the amount of $583,333. The amount we can borrow on the Revolving Credit
includes 85% of eligible accounts and 60% of eligible inventory (up to a maximum of $9,000,000). The Mortgage Loan is amortized
over a term of 25 years. The maturity date of the facility is April 30, 2013.

On April 30, 2010, the loan transaction
was closed and loan advances were made by Harris in the aggregate amount of $11,964,739 to pay off all loan balances and lease
obligations of the Company with Charter One Bank, N.A. and RBS Asset Finance, Inc. The advances included $8,548,000 under the Revolving
Credit and $500,000 under the Equipment Loan.

22

Certain terms of the loan agreement, as amended, include:

·

Restrictive Covenants: The Loan Agreement includes
several restrictive covenants under which we are prohibited from, or restricted in our ability to:

o

Borrow money;

o

Pay dividends and make distributions;

o

Make certain investments;

o

Use assets as security in other transactions;

o

Create liens;

o

Enter into affiliate transactions;

o

Merge or consolidate; or

o

Transfer and sell assets.

·

Financial Covenants: The Loan Agreement includes
a series of financial covenants we are required to meet including:

o

We are required to maintain a tangible net worth (plus
Subordinated Debt) in excess of $7,100,000 plus 50% of cumulative net income of the Company after January 1, 2010;

o

We are required to maintain specified ratios of senior
debt to EBITDA on an annual basis and determined quarterly; and,

o

We are required to maintain a level of adjusted EBITDA
to fixed charges on an annual basis determined quarterly of not less than 1.1 to 1. Adjusted EBITDA is EBITDA minus (i) taxes
paid, (ii) dividends paid, (iii) payments for the purchase or redemption of stock, and (iv) unfunded capital expenditures.

As of December 31, 2011 the Company was
in compliance with these financial covenants.

The loan agreement provides for interest at varying rates in
excess of the prime rate, depending on the level of senior debt to EBITDA over time. The initial interest rate under the loan was
4.00% per annum. On a quarterly basis, this ratio will be measured and the interest rate changed in accordance to the table below.

When Senior Debt to EBITDA is:

The Premium
to the Prime
Rate is:

Greater than or equal to 3.25 to 1.00

1.25%

Greater than or equal to 2.25 to 1.00; Less than 3.25 to 1.00

0.75%

Less than or equal to 2.25 to 1.00

0.50%

At December 31, 2011 the Company was paying
the premium of 0.75% over prime.

John H. Schwan and Stephen M. Merrick each,
as officers, directors and principal shareholders of the Company have personally guaranteed the obligations of the Company to Harris
up to $1,750,000.

On July 1, 2011, we entered into an
interest rate swap agreement with BMO Capital Markets with respect to $6,780,000 of our loan balances with Harris. This swap
agreement limits the Company’s exposure to interest rate fluctuations on the Company’s floating rate loans. The
swap agreement has the effect of fixing the interest rate on the loan balances covered by the swap at 4.65% per annum. The
swap agreement has not been designated as a hedge for accounting purposes and we determine and record the fair value of the
swap agreement each quarter. This value is recorded on the balance sheet of the Company and the amount of the unrealized gain
or loss for each period is recorded as interest income or expense on the statement of operations.

23

Current Assets. As of December 31,
2011, the total current assets of the Company were $23,301,000, compared to total current assets of $21,426,000 at December 31,
2010. The change in current assets reflects, principally, (i) an increase in net inventories of $2,970,000, (ii) a decrease in
accounts receivable of $1,442,000, (iii) an increase in the net deferred income tax asset of $10,000, and (iv) an increase in prepaid
expenses and other current assets of $761,000.

Current Liabilities. Total current
liabilities decreased from $17,952,000 as of December 31, 2010 to $17,687,000 as of December 31, 2011. Accrued other liabilities
includes $139,000 in payroll accruals. Changes in current liabilities included: (i) an increase of $2,052,000 in trade payables,
(ii) a decrease of the line of credit of $928,000, and (iii) a decrease in accrued and other liabilities in the amount of $948,000.

Liquidity and Capital Resources;
Working Capital. As of December 31, 2011, our current assets exceeded our current liabilities by $5,612,000, we had cash
and cash equivalents of $339,000 and there was available under our line of credit up to $2,106,000 in additional funds. While management
believes that these available funds, our internally generated funds and the borrowing capacity under our revolving line of credit
facility will be sufficient to meet working capital requirements for the remainder of 2012, the Company is presently negotiating
for expanded credit facilities in order to support working capital requirements of anticipated sales growth and capital expenditures.

CTI Industries Corporation Stockholders’ Equity. Stockholders’
equity was $11,861,000 as of December 31, 2011 compared to $11,784,000 as of December 31, 2010.

Seasonality

In the foil product line, sales have historically
been seasonal with approximately 40% occurring in the period from December through March of the succeeding year and 24% being generated
in the period July through October in recent years. The sale of latex balloons, pouches and laminated film products have not historically
been seasonal, and as sales in these products lines have increased as a percentage of total sales, the seasonality of the Company's
total net sales has decreased.

Critical Accounting Policies

The financial statements of the Company
are based on the selection and application of significant accounting policies which require management to make various estimates
and assumptions. The following are some of the more critical judgment areas in the application of our accounting policies that
currently affect our financial condition and results of operation.

24

Revenue Recognition. Substantially
all of the Company's revenues are derived from the sale of products. With respect to the sale of products, revenue from a transaction
is recognized when (i) a definitive arrangement exists for the sale of the product, (ii) delivery of the product has occurred,
(iii) the price to the buyer has been fixed or is determinable, and (iv) collectibility is reasonably assured. The Company generally
recognizes revenue for the sale of products when the products have been shipped and invoiced. In some cases, product is provided
on consignment to customers. In those cases, revenue is recognized when the customer reports a sale of the product.

Allowance for Doubtful Accounts.
We estimate our allowance for doubtful accounts based on an analysis of specific accounts, an analysis of historical trends, payment
and write-off histories. Our credit risks are continually reviewed and management believes that adequate provisions have been made
for doubtful accounts. However, unexpected changes in the financial condition of customers or changes in the state of the economy
could result in write-offs which exceed estimates and negatively impact our financial results.

Inventory Valuation. Inventories
are stated at the lower of cost or market. Cost is determined using standard costs which approximate costing determined on a first-in,
first out basis. Standard costs are reviewed and adjusted at the time of introduction of a new product or design, periodically
and at year-end based on actual direct and indirect production costs. On a periodic basis, the Company reviews its inventory levels
for estimated obsolescence or unmarketable items, in reference to future demand requirements and shelf life of the products. As
of December 31, 2011, the Company had established a reserve for obsolescence, marketability or excess quantities with respect to
inventory in the aggregate amount of $384,000. As of December 31, 2010, the amount of the reserve was $376,000. In addition, on
a periodic basis, the Company disposes of inventory deemed to be obsolete or unsaleable and, at such time, records an expense for
the value of such inventory. We record freight income as a component of net sales and record freight costs as a component of cost
of goods sold.

Valuation of
Long-Lived Assets. We evaluate whether events or circumstances have occurred which indicate that the carrying amounts of
long-lived assets (principally property and equipment and goodwill) may be impaired or not recoverable. Significant factors
which may trigger an impairment review include: changes in business strategy, market conditions, the manner of use of an
asset, underperformance relative to historical or expected future operating results, and negative industry or economic
trends. We apply the provisions of GAAP USA under which goodwill is evaluated at least annually for impairment. We conducted
a a qualitative assessment of our goodwill in our Mexico subsidiary for the year ended December 31, 2011 and 2010 and
determined that, due to the substantial increase in raw materials: it is more likely than not that its fair value could be
less than the carrying amount. We then performed a quantitative assessment in which we considered the assets and liabilities
of the subsidiary, both recognized and unrecognized, as well as the cash flow necessary to operate the business relating to
the assets and liabilities. From this quantitative assessment, we determined the fair value of the subsidiary exceeds the
carrying amount initially recorded on December 31, 2006, and were therefore not impaired.

25

Foreign Currency Translation. All
balance sheet accounts are translated using the exchange rates in effect at the balance sheet date. Statements of operations amounts
are translated using the average exchange rates for the year-to-date periods. The gains and losses resulting from the changes in
exchange rates during the period have been reported in other comprehensive income or loss.

Stock-Based Compensation. We follow
GAAP USA which requires all stock-based payments to employees, including grants of employee stock options, to be recognized in
the consolidated financial statements based on their grant-date fair values.

We use the Black-Scholes option pricing
model to determine the fair value of stock options which requires us to estimate certain key assumptions. In accordance with the
application of GAAP USA, we incurred employee stock-based compensation cost of $134,000 for the year ended December 31, 2011. At
December 31, 2011, we had $197,000 of unrecognized compensation cost relating to stock options.

Income Taxes and Deferred Tax Assets.
Income taxes are accounted for as prescribed in GAAP USA. Under the asset and liability method of GAAP USA, the Company recognizes
the amount of income taxes currently payable. Deferred tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of existing assets and liabilities, and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the
years these temporary differences are expected to be recovered or settled.

As of December 31, 2011, the Company had
a net deferred tax asset of $957,000 representing the amount the Company may recover in future years from future taxable income.
As of December 31, 2010, the amount of the net deferred tax asset was $1,111,000. Each quarter and year-end, management makes a
judgment to determine the extent to which the deferred tax asset will be recovered from future taxable income. Management reduced
the valuation allowance related to the deferred tax asset to zero in 2010.

Fair Value Measurements

In September 2006, the FASB issued GAAP
USA which defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the
quality of inputs used to measure fair value and enhances disclosure requirements for fair value measurements. GAAP USA clarifies
that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants. GAAP USA also requires that a fair value measurement reflect the assumptions
market participants would use in pricing an asset or liability based upon the best information available. In February 2008, the
FASB issued guidance now codified in GAAP USA which provides for delayed application of certain guidance related to non-financial
assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements
on a recurring basis (at least annually).

26

In February 2007, the FASB issued GAAP
USA which permits companies to choose to measure certain financial instruments and other items at fair value. The standard requires
that unrealized gains and losses are reported in earnings for items measured using the fair value option. GAAP USA was effective
for us on January 1, 2008. We did not elect the fair value option for any assets or liabilities that were not previously carried
at fair value. Accordingly, the adoption of GAAP USA had no impact on our consolidated financial statements.

In October 2008, the FASB issued clarification
to GAAP USA which clarifies the application of GAAP USA in a market that is not active, and addresses application issues such as
the use of internal assumptions when relevant observable data does not exist, the use of observable market information when the
market is not active, and the use of market quotes when assessing the relevance of observable and unobservable data. GAAP USA is
effective for all periods presented. The adoption of GAAP USA did not have a significant impact on our consolidated financial statements.

Reclassifications and Adoption of New Accounting Pronouncements

As of January 1, 2009 we adopted a new
generally accepted accounting principle related to noncontrolling interest in the consolidated financial statements that required
retrospective application, in which all periods presented reflect the necessary changes.

Reference is made to the Consolidated Financial
Statements contained in Part IV hereof.

Item No. 9 – Changes in and Disagreements
with Accountants on Accounting and Financial Disclosure

None.

Item No. 9A – Controls and Procedures

Disclosure Controls and Procedures

As required by Rule 13a-15(b) under
the Exchange Act, we conducted an evaluation, under the supervision and with the participation of our management, including
our Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures as of December 31, 2011, the end of the period covered by this report. Based upon that
evaluation, the Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls
and procedures are designed to provide reasonable assurance that the information required to be disclosed in our Exchange Act
reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms
and that such information is accumulated and communicated, as appropriate, to allow for timely decisions regarding required
disclosure as of December 31, 2011. There were no material changes in our internal control over financial reporting during the
fourth quarter of 2011 that have materially affected or are reasonably likely to materially affect our internal controls
over financial reporting.

27

Management’s Report on Internal
Control over Financial Reporting

Management is responsible for establishing
and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted
accounting principles. Internal control over financial reporting includes those policies and procedures that (i) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets; (ii)
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with U.S. generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations
of the management and the Board; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of Company assets that could have a material effect on the financial statements.

Our management conducted an evaluation
of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated
Framework issued by the Committee Sponsoring Organizations of the Treadway Commission. This evaluation included review of the documentation
of controls, evaluation of the design effectiveness of controls, testing of the operation effectiveness of controls and a conclusion
on this evaluation. Although there are inherent limitations in the effectiveness of any system of internal controls over financial
reporting, based on our evaluation, management has concluded our internal controls over financial reporting were effective as of
December 31, 2011.

This annual report does not include an
attestation report of the company’s registered public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the company’s registered public accounting firm pursuant to temporary
rules of the Securities and Exchange Commission that permit the company to provide only management’s report in this annual
report.

Item 9B – Other Information

None

28

PART III

Item No. 10 –
Directors and Executive Officers of the Registrant

Information called for by Item 9 of Part
III is incorporated by reference to the definitive Proxy Statement for the 2012 Annual Meeting of Shareholders which is expected
to be filed with the Commission within 120 days after December 31, 2011.

Item No. 11 – Executive Compensation

Information called for by Item 10 of Part
III is incorporated by reference to the definitive Proxy Statement for the 2012 Annual Meeting of Shareholders which is expected
to be filed with the Commission within 120 days after December 31, 2011.

Information called for by Item 11 of Part
III is incorporated by reference to the definitive Proxy Statement for the 2012 Annual Meeting of Shareholders which is expected
to be filed with the Commission within 120 days after December 31, 2011.

Item No. 13 – Certain Relationships
and Related Transactions

Information called for by Item 12 of Part
III is incorporated by reference to the definitive Proxy Statement for the 2012 Annual Meeting of Shareholders which is expected
to be filed with the Commission within 120 days after December 31, 2011.

Item No. 14 – Principal Accountant
Fees and Services

Information called for by Item 13 of Part
III is incorporated by reference to the definitive Proxy Statement for the 2012 Annual Meeting of Shareholders which is expected
to be filed with the Commission within 120 days after December 31, 2011.

PART IV

Item No. 15 – Exhibits and Financial
Statement Schedules

1.

The Consolidated Financial Statements filed as part of this report on Form 10-K are listed on the accompanying Index to Consolidated
Financial Statements and Consolidated Financial Statement Schedules.

29

2.

Financial schedules required to be filed by Item 8 of this form, and by Item 15(d) below:

Schedule II Valuation and qualifying accounts

All other financial schedules are not required under the related
instructions or are inapplicable and therefore have been omitted.

3.
Exhibits:

Exhibit

Number

Document

3.1

Third Restated Certificate of Incorporation of CTI Industries Corporation (Incorporated by reference to Exhibit A contained in Registrant’s Schedule 14A Definitive Proxy Statement for solicitation of written consent of shareholders, as filed with the Commission on October 25, 1999)

Third Restated Certificate of Incorporation of CTI Industries Corporation (Incorporated by reference to Exhibit A contained in Registrant’s Schedule 14A Definitive Proxy Statement for solicitation of written consent of shareholders, as filed with the Commission on October 25, 1999)

Consolidated Statements
of Income for the years ended December 31, 2011 and 2010

F-3

Consolidated Statements
of Stockholders’ Equity and Comprehensive (Loss) Income for the years ended December 31, 2011 and 2010

F-4

Consolidated Statements
of Cash Flows for the years ended December 31, 2011 and 2010

F-5

Notes to
Consolidated Financial Statements for the years ended December 31, 2011 and 2010

F-6

Financial Statement Schedule:

Schedule II –
Valuation and Qualifying Accounts for the years ended December 31, 2011 and 2010

F-31

All other schedules for which a provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted.

Report of Independent Registered Public
Accounting Firm

The Board of Directors and Stockholders

CTI Industries Corporation

We have audited the accompanying
consolidated balance sheets of CTI Industries Corporation and Subsidiaries (the “Company”) as of December 31,
2011 and 2010, and the related consolidated statements of operations, stockholders’ equity and comprehensive (loss)
income and cash flows for the years then ended. Our audits also included the financial statement schedule listed in the Index
at item 15(a). These consolidated financial statements and consolidated schedule are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and
consolidated schedule based on our audits.

We conducted our audits in accordance with
the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.
The Company has determined that it is not required to have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of
the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing
the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial
statements referred to above present fairly, in all material respects, the financial position of CTI Industries Corporation and
Subsidiaries as of December 31, 2011 and 2010, and the results of their operations and their cash flows for the years then
ended in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related
consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as
a whole, presents fairly, in all material respects, the information set forth therein.

CTI Industries Corporation, its United
Kingdom subsidiary (CTI Balloons Limited), its Mexican subsidiaries (Flexo Universal, S.A. de C.V., CTI Mexico Corporation, S.A.
de C.V. and CTF International S.A. de C.V.), its German subsidiary (CTI Europe GmbH) and CTI Helium, Inc. (collectively, the “Company”)
(i) design, manufacture and distribute metalized and latex balloon products throughout the world and (ii) operate systems for the
production, lamination, coating and printing of films used for food packaging and other commercial uses and for conversion of films
to flexible packaging containers and other products.

2. Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include
the accounts of CTI Industries Corporation, its wholly owned subsidiaries CTI Balloons Limited, CTF International S.A. de C.V.,
and CTI Helium, Inc. and its majority owned subsidiaries, Flexo Universal, CTI Mexico Corporation and CTI Europe, as well as the
accounts of Venture Leasing S. A. de R. L. and Venture Leasing L.L.C. The last two entities have been consolidated as variable
interest entities. All significant intercompany accounts and transactions have been eliminated upon consolidation.

Variable Interest Entities

The determination of whether or not to
consolidate a variable interest entity under U.S. GAAP requires a significant amount of judgment concerning the degree of control
over an entity by its holders of variable interest. To make these judgments, management has conducted an analysis of the relationship
of the holders of variable interest to each other, the design of the entity, the expected operations of the entity, which holder
of variable interests is most “closely associated” to the entity and which holder of variable interests is the primary
beneficiary required to consolidate the entity. Upon the occurrence of certain events, management reviews and reconsiders its previous
conclusion regarding the status of an entity as a variable interest entity. Upon the adoption of amended accounting guidance applicable
to variable interest entities on January 1, 2010, management continually reconsiders whether we are deemed to be a variable interest
entity’s primary beneficiary who consolidates such entity. The Company has two entities that have been consolidated as variable
interest entities.

F-6

Foreign Currency Translation

The financial statements of foreign subsidiaries
are translated into U.S. dollars using the exchange rate at each balance sheet date for assets and liabilities, the historical
exchange rate for stockholders’ equity, and a weighted average exchange rate for each period for revenues and expenses. Translation
adjustments are recorded in accumulated other comprehensive income (loss) as the local currencies of the subsidiaries are the functional
currencies. Foreign currency transaction gains and losses are recognized in the period incurred and are included in the consolidated
statements of operations.

Use of Estimates

In preparing financial statements in conformity
with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that
affect the amounts reported of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting period in the financial statements and accompanying
notes. Actual results may differ from those estimates. The Company’s significant estimates include valuation allowances for
doubtful accounts, lower of cost or market of inventory, deferred tax assets, and recovery value of goodwill.

Cash and Cash Equivalents

Cash and cash equivalents include cash
on hand, demand deposits and short term investments with original maturities of three months or less.

Accounts Receivable

Trade receivables are carried at original
invoice amount less an estimate for doubtful receivables based on a review of all outstanding amounts on a monthly basis. Management
determines the allowance for doubtful accounts by identifying troubled accounts, evaluating the individual customer receivables
through consideration of the customer’s financial condition, credit history and current economic conditions and use of historical
experience applied to an aging of accounts. A trade receivable is considered to be past due if any portion of the receivable balance
is outstanding for a period over the customer’s normal terms. Trade receivables are written off when deemed uncollectible.
Recoveries of trade receivables previously written off are recorded when received.

Inventories

Inventories are stated at the lower of
cost or market. Cost is determined using standard costs which approximates costing determined on a first-in, first-out basis, to
reflect the actual cost of production of inventories.

F-7

Production costs of work in process and
finished goods include material, labor and overhead. Work in process and finished goods are not recorded in excess of net realizable
value.

Property, Plant and Equipment

Property and equipment are stated at cost.
Expenditures for maintenance and repairs are charged to operations as incurred. Depreciation is computed using the straight-line
method over estimated useful lives of the related assets. Leasehold improvements are amortized on a straight-line method over the
lesser of the estimated useful life or the lease term. The estimated useful lives range as follows:

Building

25 - 30 years

Machinery and equipment

3 - 15 years

Projects that prolong the life and increase efficiency of machinery

3 - 5 years

Light Machinery

5 - 10 years

Heavy Machinery

10 - 15 years

Office furniture and equipment

5 - 8 years

Leasehold improvements

5 - 8 years

Furniture and equipment at customer locations

1 - 3 years

Light machinery consists of forklifts,
scissor lifts, and other warehouse machinery. Heavy machinery consists of production equipment including laminating, printing and
converting equipment. Projects in process represent those costs capitalized in connection with construction of new assets and/or
improvements to existing assets including a factor for interest on funds committed to projects in process of $25,000 and $17,000
for the years ended December 31, 2011 and 2010, respectively. Upon completion, these costs are reclassified to the appropriate
asset class.

Stock-Based Compensation

The Company has stock-based incentive plans
which may grant stock option, restricted stock, and unrestricted stock awards. The Company recognizes stock-based compensation
expense based on the grant date fair value of the award and the related vesting terms. The fair value of stock-based
awards is determined using the Black-Scholes model, which incorporates assumptions regarding the risk-free interest rate, expected
volatility, expected option life, and dividend yield. See Note 18 for additional information.

Fair Value Measurements

GAAP USA defines fair value, establishes a framework for
measuring fair value, and requires disclosures about fair value measurements required under other accounting pronouncements. See
Note 4 for further discussion.

The Company accounts for derivative instruments in accordance with GAAP USA, which requires that all derivative
instruments be recognized on the balance sheet at fair value. We enter into interest rate swaps to fix the interest rate on a portion
of our variable interest rate debt to reduce the potential volatility in our interest expense that would otherwise result from
changes in market interest rates. Our derivative instruments are recorded at fair value and are included in accrued liabilities
of our consolidated balance sheet. Our accounting policies for these instruments are based on whether they meet our criteria for
designation as hedging transactions, which include the instrument’s effectiveness, risk reduction and, in most cases, a one-to-one
matching of the derivative instrument to our underlying transaction. Gains and losses from changes in fair values of derivatives
that are not designated as hedges for accounting purposes are recognized in the consolidated statement of operations. We have no
derivative financial instruments designated as hedges. Therefore, changes in fair value for the respective periods were recognized
in the consolidated statement of operations.

F-8

Goodwill

The Company applies the provisions of GAAP USA, under which goodwill is tested at least annually for impairment. Goodwill on the accompanying balance sheets relates
to the Company’s acquisition of Flexo Universal in a prior year as well as the investment in CTI Europe during the current
reporting period. It is the Company’s policy to perform impairment testing for Flexo Universal annually as of December 31,
or as circumstances change. An annual impairment review was completed and no impairment was noted for the years ended December
31, 2011 and 2010 (see Note 16). While the Company believes that its estimates of future cash flows are reasonable, different
assumptions regarding such cash flows could materially affect these evaluations.

Valuation of Long Lived Assets

The Company evaluates whether events or
circumstances have occurred which indicate that the carrying amounts of long-lived assets (principally property, plant and equipment)
may be impaired or not recoverable. The significant factors that are considered that could trigger an impairment review include:
changes in business strategy, market conditions, or the manner of use of an asset; underperformance relative to historical or expected
future operating results; and negative industry or economic trends. In evaluating an asset for possible impairment, management
estimates that asset’s future undiscounted cash flows and appraised values to measure whether the asset is recoverable. The
Company measures the impairment based on the projected discounted cash flows of the asset over its remaining life.

Deferred Financing Costs

Deferred financing costs are amortized on a straight line basis
over the term of the loan. Upon a refinancing, existing unamortized deferred financing costs are expensed.

Income Taxes

The Company accounts for income
taxes using the liability method. As such, deferred income taxes reflect the net tax effects of temporary differences
between carrying amounts of assets and liabilities for financial reporting purposes and the amount used for income tax
purposes. Deferred tax assets and liabilities are measured using enacted tax rates expected to be in effect when the
anticipated reversal of these differences is scheduled to occur. Deferred tax assets are reduced by a valuation allowance
when, management cannot determine, in its opinion, that it is more likely than not that the Company will recover that
recorded value of the deferred tax asset. The Company is subject to U.S. Federal, state and local taxes as well as foreign
taxes in the United Kingdom, Germany and Mexico. U.S. income tax expense and foreign withholding taxes are provided on
remittances of foreign earnings and on unremitted foreign earnings that are not indefinitely reinvested.

Unrecognized tax benefits are accounted
for as required by GAAP USA which prescribes a more likely than not threshold for financial statement presentation and measurement
of a tax position taken or expected to be taken in a tax return. See Note 11 for further discussion.

F-9

Revenue Recognition

The Company recognizes revenue when title
transfers upon shipment. Revenue from a transaction is not recognized until (i) a definitive arrangement exists, (ii) delivery
of the product has occurred or the services have been performed and legal title and risk are transferred to the customer, (iii)
the price to the buyer has been fixed or is determinable, and (iv) collectability is reasonably assured. In some cases, product
is provided on consignment to customers. For these cases, revenue is recognized when the customer reports a sale of the product.

Research and Development

The Company conducts product development
and research activities which include (i) creative product development and (ii) engineering. During the years ended December 31,
2011 and 2010, research and development activities totaled $728,000 and $443,000, respectively.

Advertising Costs

The Company expenses advertising costs
as incurred. Advertising expenses amounted to $63,000 and $203,000 for the years ended December 31, 2011 and 2010, respectively.

3. New Accounting Pronouncements

In
September 2011, the FASB issued Accounting Standards Update No. 2011-08 (“ASU 2011-08”) Intangibles – Goodwill
and Other (Topic 350). Under ASU 2011-08, an entity has the option to first assess qualitative factors to determine whether the
existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting
unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is
more likely than not that the fair value of a reporting unit is greater than its carrying amount, then performing the two-step
impairment test is unnecessary. However, if an entity concludes otherwise, then it is required to perform the first step of the
two-step impairment test. Under ASU 2011-08, an entity has the option to bypass the qualitative assessment for any reporting unit
in any period and proceed directly to performing the first step of the two-step goodwill impairment test. An entity may resume
performing the qualitative assessment in any subsequent period. ASU 2011-08 is effective for annual and interim goodwill impairment
tests performed for fiscal years beginning after December 15, 2011. We do not expect that ASU 2011-08 will have a material impact
on our financial statements or related disclosures.

In June 2011, the Financial Accounting Standards Board (FASB) issued an amendment on the presentation
of other comprehensive income. Under this amendment, entities will be required to present the total of comprehensive income, the
components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive
income or two separate but consecutive statements. The current option to report other comprehensive income and its components in
the statement of changes in equity has been eliminated. This amendment will be effective for the Company on January 1, 2012, and
retrospective application is required. The Company does not anticipate that this amendment will have a material impact on its financial
statements.

4. Fair Value Disclosures; Derivative Instruments

GAAP USA clarifies that fair value is an
exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants. GAAP USA also requires that a fair value measurement reflect the assumptions market participants would
use in pricing an asset or liability based upon the best information available.

F-10

GAAP USA establishes a three-level valuation
hierarchy for disclosure of fair value measurements. The valuation hierarchy categorizes assets and liabilities at fair value into
one of three different levels depending on the observability of the inputs employed in the measurement. The three levels are defined
as follows:

Level 1 – inputs to the valuation methodology are quoted prices (unadjusted)
for identical assets are liabilities in active markets.

Level 2 – inputs to the valuation methodology include quoted prices
for similar assets and liabilities in active markets, and inputs are observable for the asset or liability, or unobservable but
corroborated by market data, for substantially the full term of the financial instrument.

Level 3 – inputs to the valuation methodology are unobservable and
significant to the fair value measurement.

A financial instrument’s categorization
within the valuation hierarchy is based upon the lowest level of the input that is significant to the fair value measurement. The
Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment
and considers factors specific to the asset or liability. The following table presents information about the Company’s liabilities
measured at fair value on a recurring basis as of December 31, 2011 and indicates the fair value hierarchy of the valuation techniques
utilized by the Company to determine such fair value:

Amount as of

Description

12/31/2011

Level 1

Level 2

Level 3

Interest Rate Swap 2011

$

141,000

$

-

$

141,000

$

-

$

141,000

$

141,000

As of December 31, 2010, the Company did
not maintain any swap agreements.

The Company’s interest rate swap
agreements were valued using the counterparty’s mark-to-market statement, which were validated using modeling techniques
that include market inputs such as publically available interest rate yield curves, and were designated as Level 2 within the valuation
hierarchy.

GAAP USA requires an entity to recognize
all derivatives as either assets or liabilities in the consolidated balance sheet and to measure those instruments at fair value.
Under certain conditions, a derivative may be specifically designated as a fair value hedge or a cash flow hedge.

As a result of the use of derivative instruments,
the Company was exposed to risk that the counterparty might fail to meet their contractual obligations. Recent adverse developments
in the global financial and credit markets could have negatively impacted the creditworthiness of our counterparty and caused them
to fail to perform as expected. To mitigate the counterparty credit risk, we only entered into contracts with a major financial
institution based upon their credit ratings and other factors, and continually assessed the creditworthiness of the counterparty.
The counterparty performed in accordance with their contractual obligations.

F-11

On July 1, 2011, we entered into a
swap agreement with BMO Capital Markets with respect to $6,780,000 of our loan balances with Harris. This swap agreement
limits the Company’s exposure to interest rate fluctuations on the Company’s floating rate loans. The swap
agreement has the effect of fixing the interest rate on the loan balances covered by the swap at 4.65% per annum. The swap
agreement is a derivative financial instrument and we determine and record the fair value of the swap agreement each
quarter. This value is recorded on the balance sheet of the Company and the
amount of the unrealized gain or loss for each period is recorded as interest income or expense on the statement of
operations, as the swap is not designated as a hedge for accounting purposes.

Fair Values of Derivative Instruments in the Consolidated Balance Sheets

Liability Derivatives

As of

December 31

2011

2010

Derivatives not designated as hedging instruments under Statement 133

Balance Sheet Location

Fair Value

Balance Sheet Location

Fair Value

Interest Rate Contracts

Accrued Liabilities

$ 141,000

Accrued Liabilities

$ -

The Effect of Derivative Instruments on the Consolidated Statements of Operations

for the 12 month

period ending

December 31

2011

2010

Derivatives not Designated as Hedging Instruments under Statement 133

Location of Gain (Loss) Recognized in Income on Derivative

Amount of Gain (Loss) Recognized in Income on Derivative

Location of Gain (Loss) Recognized in Income on Derivative

Amount of Gain (Loss) Recognized in Income on Derivative

Interest Rate Contracts

Interest Expense

* $ (181,000)

Interest Expense

** $(208,000)

* Includes interest of $41,000 associated with variances between
fixed and variable rates.

** Designated as a cash flow hedge.

F-12

5. Other Comprehensive (Loss) Income

The following table sets forth the tax effects of components
of other comprehensive (loss) income and the accumulated balance of other comprehensive (loss) income and each component.

Tax Effects Allocated to Each Component of Other Comprehensive (Loss) Income

for the years ended December 31, 2011 and 2010

Tax

Before-Tax

(Expense)

Net-of-Tax

Amount

or Benefit

Amount

2011

Foreign currency translation adjustments

$ (692,881)

$ -

$ (692,881)

Unrealized gain on derivative instruments

-

-

-

Other comprehensive loss

$ (692,881)

$ -

$ (692,881)

Tax

Before-Tax

(Expense)

Net-of-Tax

Amount

or Benefit

Amount

2010

Foreign currency translation adjustments

$ 22,029

$ -

$ 22,029

Unrealized gain on derivative instruments

188,615

-

188,615

Other comprehensive income

$ 210,644

$ -

$ 210,644

Accumulated Other Comprehensive (Loss) Income Balances as of December 31, 2011

Accumulated

Foreign

Unrealized

Other

Currency

Gain (Loss) on

Comprehensive

Items

Derivatives

Income (Loss)

Beginning balance

$ (1,592,798)

$ -

$ (1,592,798)

Current period change

(692,881)

-

(692,881)

Ending balance

$ (2,285,679)

$ -

$ (2,285,679)

Accumulated Other Comprehensive (Loss) Income Balances as of December 31, 2010

Accumulated

Foreign

Unrealized

Other

Currency

Gain (Loss) on

Comprehensive

Items

Derivatives

Income (Loss)

Beginning balance

$ (1,614,827)

$ (188,615)

$ (1,803,442)

Current period change

22,029

188,615

210,644

Ending balance

$ (1,592,798)

$ -

$ (1,592,798)

F-13

For the years ended December 31,
2011 and 2010, no tax benefit has been recorded on the foreign currency translation adjustments, as such amounts would result
in a deferred tax asset and the associated long-term intercompany balances are not currently expected to be repaid in the
foreseeable future.

6. Major Customers

For the year ended December 31, 2011, the
Company had three customers that accounted for approximately 28.8%, 12.2% and 9.4% of consolidated net sales. In 2010, the top
three customers accounted for approximately 28.7%, 14.2% and 12.3%. At December 31, 2011, the outstanding accounts receivable balances
due from these three customers were $2,390,000, $746,000 and $0, respectively. At December 31, 2010, the outstanding accounts receivable
balances due from these three customers were $3,599,000, $389,000 and $224,000, respectively.

7. Inventories

Inventories are stated at the lower of
cost or market. Cost is determined using standard costs which approximate costing determined on a first-in, first out basis. Standard
costs are reviewed and adjusted periodically and at year end based on actual direct and indirect production costs. On a periodic
basis, the Company reviews its inventory for estimated obsolescence or unmarketable items, primarily by reviewing future demand
requirements and shelf life of the product.

Inventories are comprised of the following:

December 31, 2011

December 31, 2010

Raw materials

$

3,027,000

$

2,588,000

Work in Process

1,503,000

685,000

Finished Goods

9,193,000

7,471,000

Allowance for excess quantities

(384,000)

(376,000)

Total inventories

$

13,339,000

$

10,368,000

F-14

8.

Notes Payable and Capital Leases

Long term debt consists of:

Dec. 31, 2011

Dec. 31, 2010

Term Loan with Barrington Bank, payable in monthly installments of $11,000 amortized over 7 years, interest at 6.25%, balance due May 2016, which uses balloon production and related equipment as collateral.

$

779,000

$

-

Term Loan with Harris, payable in monthly installments of $58,333 plus interest at prime (3.25%) plus a premium rate (based on loan covenants) of 0.50% (3.75%) at December 31, 2010 (amortized over 10 months), balance due January 31, 2011.

-

117,000

Mortgage Loan with Harris, payable in monthly installments of $7,778 plus interest at prime (3.25%) plus a premium rate (based on loan covenants) of 0.75% (4.00%) and 0.50% (3.75%) at December 31, 2011 and 2010, respectively (amortized over 25 years), balance due April 30, 2013.

2,178,000

2,271,000

Equipment Loan with Harris, payable in monthly installments of $22,323 beginning May 2012 plus interest at prime (3.25%) plus a premium rate (based on loan covenants) of 0.75% (4.00%) at December 31, 2011, (amortized over 60 months), balance due April 30, 2013. (2010) Equipment Loan with Harris, payable in monthly installments of $8,333 beginning May 2011 plus interest at prime (3.25%) plus a premium rate (based on loan covenants) of 0.50% (3.75%) at December 31, 2010, (amortized over 60 months), balance due April 30, 2013.

Subordinated Notes (Officers) due on demand, interest at prime (3.25%) plus 2% (5.25%) at December 31, 2011 and 2010, net of debt discount of $0 and $5,000 at December 31, 2011 and 2010, respectively (See Note 10).

On April 29, 2010, the Company entered
into a Credit Agreement and associated documents with Harris N.A. (“Harris”) under which Harris agreed to extend to
the Company a credit facility in the aggregate amount of $14,417,000. The facility includes (i) a Revolving Credit providing for
maximum advances to the Company, and letters of credit, based upon the level of availability measured by levels of eligible receivables
and inventory of the Company of $9,000,000, (ii) an Equipment Loan of up to $2,500,000 providing for loans for the purchase of
equipment, (iii) a Mortgage Loan of $2,333,350, and (iv) a Term Loan in the amount of $583,333. The amount we can borrow on the
Revolving Credit includes 85% of eligible accounts and 60% of eligible inventory (up to a maximum of $9,000,000). The Mortgage
Loan is amortized over a term of 25 years. The maturity date of the facility is April 30, 2013. As of December 31, 2011 the balance
outstanding on the Revolving Line of credit with Harris was $7,144,000, which bears interest of 4%, leaving an available balance
of $2,106,000.

On April 30, 2010, the loan transaction
was closed and loan advances were made by Harris in the aggregate amount of $11,964,739 to pay off all loan balances and lease
obligations of the Company with RBS Citizens, N.A. and RBS Asset Finance, Inc. The advances included $8,548,000 under the Revolving
Credit and $500,000 under the Equipment Loan.

Certain terms of the loan agreement, as amended, include:

·

Restrictive Covenants: The Loan Agreement includes
several restrictive covenants under which we are prohibited from, or restricted in our ability to:

o

Borrow money;

o

Pay dividends and make distributions;

o

Make certain investments;

o

Use assets as security in other transactions;

o

Create liens;

o

Enter into affiliate transactions;

o

Merge or consolidate; or

o

Transfer and sell assets.

·

Financial Covenants: The Loan Agreement includes
a series of financial covenants we are required to meet including:

o

We are required to maintain a tangible net worth (plus
Subordinated Debt) in excess of $7,100,000 plus 50% of cumulative net income of the Company after January 1, 2010;

o

We are required to maintain specified ratios of senior
debt to EBITDA on an annual basis and determined quarterly; and,

o

We are required to maintain a level of adjusted EBITDA
to fixed charges on an annual basis determined quarterly of not less than 1.1 to 1. Adjusted EBITDA is EBITDA minus (i) taxes
paid, (ii) dividends paid, (iii) payments for the purchase or redemption of stock, and (iv) unfunded capital expenditures.

F-16

As of December 31, 2011, the
Company was in compliance with these covenants.

John H. Schwan and Stephen M. Merrick each,
as officers, directors and principal shareholders of the Company have each personally guaranteed the obligations of the Company
to Harris up to $1,750,000. In the agreement, the amount of the maximum liability to each decreases to $1,500,000 if the senior
leverage ratio requirement is met. At December 31, 2011 and 2010, the Company had met this requirement (see Note 14).

Future minimum principal payments for amounts outstanding under
these long-term debt agreements for each of the years ended December 31 are:

2012

$

1,797,000

2013

3,356,000

2014

118,000

2015

158,000

2016

396,000

Thereafter

143,000

Total

$

5,968,000

9.

Current Liabilities

As of December 31, 2011 and 2010, Accrued
Liabilities include $139,000 and $137,000 in payroll accruals, respectively.

10.

Subordinated Debt

In February 2003, the Company received
$1,630,000 from certain shareholders in exchange for (i) 9% subordinated notes and (ii) five year warrants to purchase 163,000
common shares at $4.87 per share. The proceeds were to (i) re-finance the bank loan of CTI Mexico in the amount of $880,000 and
(ii) to provide financing for CTI Mexico and Flexo Universal. The value of the warrants was $460,000 calculated using Black-Scholes
option pricing formula. The Company applied the discount against the subordinated debt. The discount wasamortized using the effective
interest method to interest expense over the term of the debt. These loans are subordinated to the bank debt of the Company. On
February 8, 2008 those shareholders exercised these warrants in exchange for a reduction on these notes of $794,000. The remaining
balance of $33,000 is due on demand.

In February 2006, the Company received
$1,000,000 from certain shareholders in exchange for (i) five year subordinated notes bearing interest at 2% over the prime rate
determined on a quarterly basis and (ii) five year warrants to purchase an aggregate of 303,030 shares of common stock of the Company
at the price of $3.30 per share. The proceeds were to fund capital improvements and give additional liquidity to the Company. The
value of the warrants was $443,000 using the Black-Scholes option pricing formula. The Company applied the discount against the
subordinated debt. The discount wasamortized using the effective interest method to interest expense over the term of the debt.
These loans are subordinated to the bank debt of the Company. On May 28, 2010, these shareholders exercised all of these warrants
in exchange for note indebtedness. The remaining balance of $597,000 is due on demand.

F-17

At various times from 2003 to 2005, certain
shareholders loaned an aggregate of $814,000 to the Company in exchange for notes bearing interest at an annual rate of 8%. These
notes are subordinated to the bank loan of the Company. The remaining
balance of $795,000 is due on demand.

At various times from 2003 to 2006, certain
shareholders loaned amounts to the Company in exchange for notes bearing interest of 8.5%. These notes are subordinated to
the bank loan of the Company. The remaining balance of $104,000 is due in 2013.

11.

Income Taxes

The income tax provisions are comprised of the following: :

Dec. 31 2011

Dec. 31 2010

Current:

Federal

$

-

$

-

State

15,851

-

Foreign

149,763

385,792

$

165,614

$

385,792

Deferred

Federal

$

228,524

$

(43,104)

State

-

-

Foreign

(74,694)

-

153,830

(43,104)

Total Income Tax Provision

$

319,444

$

342,688

The components of the net deferred tax asset at December 31
are as follows:

2011

2010

Deferred tax assets:

Allowance for doubtful accounts

$

11,682

$

13,748

Inventory allowances

181,170

141,244

Accrued liabilities

70,765

92,095

Unicap 263A adjustment

151,625

145,035

Net operating loss carryforwards

955,717

975,327

Alternative minimum tax credit carryforwards

351,619

351,619

State investment tax credit carryforward

30,512

30,512

Foreign tax credit carryforward

298,635

298,636

Other foreign tax items

246,473

247,035

Foreign asset tax credit carryforward

-

(80,368)

Total deferred tax assets

2,298,198

2,214,883

Deferred tax liabilities:

Book over tax basis of capital assets

(1,175,615)

(943,582)

Other foreign tax items

(165,099)

(159,986)

Net deferred tax assets

$

957,484

$

1,111,315

F-18

The Company maintained a valuation allowance with respect to
deferred tax assets as a result of the uncertainty of ultimate realization as of December 31, 2009. At December 31, 2011 and 2010,
the Company believes that it is more likely than not that it will utilize all of its net operating loss carry forwards and no
longer requires a valuation allowance. The Company has a net operating loss carryforwards of approximately $2,730,000 expiring
in various years through 2025. In addition, the Company has approximately $352,000 of alternative minimum tax credits as of December
31, 2011, which have no expiration date.

Income tax provisions differed from the
taxes calculated at the statutory federal tax rate as follows:

Years Ended December 31,

2011

2010

Taxes at statutory rate

$

245,966

$

733,585

State income taxes

43,395

100,983

Nondeductible expenses

57,772

55,871

Decrease in deferred tax valuation allowance

-

(528,988)

Foreign taxes and other

(27,689)

(18,763)

Income tax provision

$

319,444

$

342,688

The Company files tax returns in the U.S.
federal and U.K, Germany and Mexico foreign tax jurisdictions and various state jurisdictions. The tax years 2006 through 2010
remain open to examination. Our policy is to recognize interest and penalties related to uncertain tax positions in income tax
expense. During the twelve months ended December 31, 2011 and 2010, the Company did not recognize expense for interest or penalties,
and do not have any amounts accrued at December 31, 2011 and 2010, as the Company does not believe it has taken any uncertain tax
positions.

12.

Notes Payable Affiliates

Items identified as Notes Payable Affiliates
in the Company's Consolidated Balance Sheet as of December 31, 2011 include loans by shareholders to Flexo Universal totaling $112,000
as well as a loan to CTI Europe totaling $27,000. The remaining balance of $1,000 represents loans from a number of various
employees of Flexo Universal.

F-19

13. Employee Benefit Plan

The Company has a defined contribution
plan for substantially all employees. Profit sharing contributions may be made at the discretion of the Board of Directors. Effective
January 1, 2006, the Company amended its defined contribution plan. Under the amended plan, the maximum contribution for the Company
is 4% of gross wages. Employer contributions to the plan totaled $113,000 and $106,000 for the years ended December 31, 2011 and
2010, respectively.

14.

Related Party Transactions

Stephen M. Merrick is of counsel to a law
firm from which we received legal services during the year. Mr. Merrick is both a director and a shareholder of the Company. Legal
fees paid to this firm were $127,000 and $154,000 for the years ended December 31, 2011 and 2010, respectively.

John H. Schwan, Chairman of the Company,
is a principal of Shamrock Packaging and affiliated companies. The Company made payments for of packaging materials, rent and temporary
employees from Shamrock of approximately $2,019,000 and $2,076,000 during the years ended December 31, 2011 and 2010, respectively.

John H. Schwan, Chairman of the Company,
is an owner of White Horse Production, Inc. The Company made payments for website services from White Horse of approximately $15,000
and $21,000 during the years ended December 31, 2011 and 2010, respectively.

John H. Schwan, Chairman of the Company,
and Howard W. Schwan, President of the Company, are the brothers of Gary Schwan, an owner of Schwan Incorporated which provides
building maintenance and remodeling services to the Company. The Company made payments to Schwan Incorporated of approximately
$37,000 and $44,000 during the years ended December 31, 2011 and 2010, respectively.

During the period from January 2003 to
the present, John H. Schwan, Chairman of the Company, and Stephen M. Merrick, Executive Vice President and Chief Financial Officer,
have made loans to the Company and to Flexo which have outstanding balances, for the Company of $1,425,000 and $1,420,000 (net
of discount of $0 and $5,000, respectively) and for Flexo of $104,000 and $351,000 as of December 31, 2011 and 2010, respectively.

During 2011 and 2010, interest expense to these individuals
on these outstanding loans was $112,000 and $217,000, respectively (see Notes 10 and 12).

As disclosed in Note 10, on February 1,
2006, two principal officers and shareholders of the Company each loaned to our Company the sum of $500,000 in exchange for Promissory
Notes and five year warrants to purchase up to 151,515 shares of common stock of the Company at the price of $3.30 per share. On
May 28, 2010, each of these officer/shareholders exercised the warrants to purchase 151,515 shares each of common stock of the
Company in exchange for cancellation of indebtedness of the Company to them in the amount of the purchase price for the shares.

F-20

On October 1, 2008, the Company issued
warrants to purchase 20,000 shares of common stock of the Company to both John Schwan and Stephen M. Merrick exercisable at the
price of $4.80 per share (see Note 18).

During 2010, two entities owned by John
H. Schwan and Stephen M. Merrick provided financing for the acquisition and construction of latex balloon production and related
equipment (see Note 15).

Other Assets include amounts due to the
Company from its employees. As of December 31, 2011 and 2010, the balance outstanding on these amounts was $29,000 and $213,000,
respectively.

Items identified as Notes Payable Affiliates
in the Company's Consolidated Balance Sheet as of December 31, 2011 include loans by shareholders to Flexo Universal totaling $112,000
as well as a loan to CTI Europe totaling $27,000. The remaining balance of $1,000 represents loans from a number of various
employees of Flexo Universal (see Note 12).

15. Variable Interest Entities (“VIE”) and Transactions

During 2010, two entities owned by officers
and principal shareholders of the Company (John H. Schwan and Stephen M. Merrick) provided financing for Flexo Universal, the Company’s
Mexico subsidiary, for the acquisition and construction of latex balloon production and related equipment. The entities included
Venture Leasing L.L.C., (“VLUS”), an Illinois limited liability company which is 100% owned by an entity owned by Mr.
Schwan and Mr. Merrick, and Venture Leasing Mexico S. A. de R. L (“VLM”), a Mexico company which is also owned 100%
by entities owned by Mr. Schwan and Mr. Merrick. The Company is the primary beneficiary of VLUS & VLM and accordingly consolidated
the result of the entities in its financial statements.

Mr. Schwan and Mr. Merrick, through entities
owned by them, arranged for a line of credit in the amount of $1,000,000 from Barrington Bank in order to loan monies to VLUS as
needed. During 2010, VLUS received advances on this line totaling $700,000. VLUS loaned substantially all of these funds to VLM.
VLM utilized the funds to purchase materials, parts, components and services for the acquisition and construction of balloon production
and related equipment to be placed at the premises of Flexo Universal. Assembly and construction of this equipment was completed
on or about December 31, 2010 and, in January 2011, the equipment has been placed in service at Flexo Universal.

Title to the equipment remains in the name
of VLM. VLM leases the equipment to Flexo Universal under a three-year lease under which Flexo Universal will pay to VLM rental
payments at the rate of approximately $9,000 per month and will have the right to purchase the equipment from VLM at the expiration
of the lease at fair market value. The Company has not provided any guarantees related to VLUS or VLM and no creditors of the variable
interest entities have recourse to the general credit of the Company as a result of including VLUS & VLM in the consolidated
financial statements.

F-21

The accounts of VLM and VLUS have been
consolidated with the accounts of the Company for 2011 and 2010 and will be consolidated in the future.

Dec. 31, 2011

Dec. 31, 2010

Current Assets

$

104,926

$

132,576

Property, plant and equipment, net

550,315

586,536

Other noncurrent assets

773,913

710,038

Total assets

$

1,429,154

$

1,429,150

Mortgages and other long-term debt payable

$

1,488,285

$

1,434,852

Total liabilities

$

1,488,285

$

1,434,852

16.

Goodwill

Under the provisions of GAAP USA, goodwill
is subject to at least annual assessments for impairment by applying a fair-value based test. GAAP USA also requires that an acquired
intangible asset should be separately recognized if the benefit of the intangible asset is obtained through contractual or other
legal rights, or if the asset can be sold, licensed, rented or exchanged, regardless of the acquirer’s intent to do so. The
Company has no acquired intangible assets other than goodwill.

As of December 31, 2011 and 2010, we determined
that the fair value of the Company’s interest in goodwill related to Flexo Universal as recorded was not impaired. The carrying
amount of goodwill as of December 31, 2011 and 2010 was $989,000.

During 2010, the Company purchased an
additional interest of $101,000 in its German subsidiary, CTI Europe, and recorded $44,000 of goodwill in the
transaction. We have determined that the fair value of the Company's interest in the goodwill related to CTI Europe was
not impaired as of December 31, 2011 and 2010.

17.

Commitments

Operating Leases

The Company’s United Kingdom subsidiary
maintains a lease for office and warehouse space which expires December 2014 at a cost of $5,000 per month. In August 2011, Flexo
Universal entered into a 5-year lease to rent 73,000 square feet of warehouse and office space in Guadalajara, Mexico at the cost
of $30,000 per month. In September 2010, the Company’s German subsidiary entered into a 3-year lease to rent approximately
3,000 square feet of office and warehouse space in Heusenstamm, Germany at a cost of $2,000 per month. The Company leases office
and warehouse equipment under operating leases, which expire on various dates through September 2012. All of the Company’s
lease payments are recognized on a straight-line basis as none of the leases have escalation clauses.

F-22

The net lease expense was $683,000 and
$553,000 for the years ended December 31, 2011 and 2010, respectively.

The
future aggregate minimum net lease payments under existing agreements as of December 31, are as follows:

2012

$

866,000

2013

616,000

2014

597,000

2015

503,000

2016

269,000

Thereafter

-

Total

$

2,851,000

Licenses

The Company has certain merchandising license
agreements, which are of a one to two year duration that require royalty payments based upon the Company’s net sales of the
respective products. The agreements call for guaranteed minimum commitments that are determined on a calendar year basis. Future
guaranteed commitments due, as computed on a pro rata basis, as of December 31, are as follows:

2012

$

152,000

18.

Stockholders’ Equity

Stock Options

The Company has adopted GAAP USA which
requires all stock-based payments to employees, including grants of employee stock options, to be recognized in the consolidated
financial statements based on their grant-date fair values.

F-23

The Compensation Committee administers
the stock-based plans. The exercise price for Incentive Stock Options (“ISO”) cannot be less than the fair value
of the stock subject to the option on the grant date (110% of such fair value in the case of ISOs granted to a stockholder
who owns more than 10% of the Company’s Common Stock). The exercise price of a Non-Qualified Stock Options (“NQSO”)
shall be fixed by the Compensation Committee at whatever price the Committee may determine in good faith. Unless the Committee
determines otherwise, options beginning with the 2007 Plan generally have a 4-year term with a 3-year vesting schedule. Unless
the Committee provides otherwise, options terminate upon the termination of a participant’s employment, except that the participant
may exercise an option to the extent it was exercisable on the date of termination for a period of time after termination. Officers,
directors and employees of, and consultants to the Company, or any parent or subsidiary corporation selected by the Committee,
are eligible to receive options under the Plan. Subject to certain restrictions, the Committee is authorized to designate the number
of shares to be covered by each award, the terms of the award, the date on which and the rates at which options or other awards
may be exercised, the method of payment, vesting and other terms.

The Company has applied the Black-Scholes
model to value stock-based awards. That model incorporates various assumptions in the valuation of stock-based awards relating
to the risk-free rate of interest to be applied, the estimated dividend yield and expected volatility of the Company’s Common
Stock. The risk-free rate of interest is the U.S. Treasury yield curve for periods within the expected term of the option at the
time of grant. The expected volatility is based on historical volatility of the Company’s Common Stock.

The valuation assumptions we have applied
to determine the value of stock-based awards were as follows:

Historical stock price volatility: The
Company used the weekly closing price to calculate historical annual volatility.

Risk-free interest rate: The Company bases
the risk-free interest rate on the rate payable on US treasury securities in effect at the time of the grant.

Expected life: The expected life of the
option represents the period of time options are expected to be outstanding. The Company uses an expected life of 2.8 years.

Dividend yield: The dividend yield is estimated
to be 1.14%, based on the stock price at December 31, 2011.

Estimated forfeitures: When estimating
forfeitures, the Company considers historical terminations as well as anticipated retirements.

The Company, at the discretion of the board,
may issue options in excess of the total available, if options related to that stock plan are cancelled. In some cases, not all
shares that are available to a stock plan are issued, as the Company is unable to issue options to a previous plan when a new plan
is in place.

F-24

The Company’s pre-tax income for
the fiscal year ended December 31, 2011 and 2010 includes approximately $134,000 and $131,000, respectively, of compensation costs
related to share-based payments. As of December 31, 2011, there is $197,000 of unrecognized compensation expense related to non-vested
stock option grants. We expect approximately $88,000, $59,000, $41,000 and $9,000 to be recognized during 2012, 2013, 2014 and
2015, respectively.

On March 19, 1999, the Board of Directors
approved for adoption, effective May 6, 1999, the 1999 Stock Option Plan (“1999 Plan”). The 1999 Plan authorizes the
grant of options to purchase up to an aggregate of 158,733 shares of the Company’s Common Stock. As of December 31, 2010,
148,223 options have been granted under the 1999 Plan and were fully vested at the time of grant. During 2010, 25,786 options were
exercised and no options remain outstanding as of December 31, 2010.

On April 12, 2001, the Board of
Directors approved for adoption, effective December 27, 2001, the 2001 Stock Option Plan (“2001 Plan”). The 2001
Plan authorizes the grant of options to purchase up to an aggregate of 119,050 shares of the Company’s Common Stock. As
of December 31, 2011, 139,958 options (including cancelled shares re-issued under the Plan) have been granted and were fully
vested at the time of grant; 7,500 remain outstanding. No options were exercised during 2011.

On April 24, 2002, the Board of Directors
approved for adoption, effective October 12, 2002, the 2002 Stock Option Plan (“2002 Plan”). The 2002 Plan authorizes
the grant of options to purchase up to an aggregate of 142,860 shares of the Company’s Common Stock.As of December 31, 2011, 123,430 options have been granted and were fully vested at the time of grant; 27,500 remain outstanding.
No options were exercised during 2011.

On June 22, 2007, the Board of Directors
approved for adoption, effective October 1, 2007, the 2007 Stock Incentive Plan (“2007 Plan”). The 2007 Plan authorizes
the grant of options to purchase up to an aggregate of 150,000 shares of the Company’s Common Stock. On October 1,
2007, the company issued 74,000 options under the 2007 Plan. During 2008, the company issued an additional 77,500 options under
the 2007 Plan. Under this plan, 46,000 options remain outstanding all of which are fully vested. During 2011, 40,000 options expired,
3,750 options were cancelled and 4,000 options were exercised.

Also under the 2007 Plan, in January 2010,
the Company granted 14,250 restricted shares. During 2010, 7,125 shares had their restriction expire and the remaining 7,125 shares
will have their restriction expire during 2011, the value of these shares were determined using the market value of the Company’s
shares on the day the shares were issued.

F-25

On April 10, 2009, the Board
of Directors approved for adoption, and on June 5, 2009, the shareholders of the Company approved the 2009 Stock Incentive
Plan (“2009 Plan”). The 2009 Plan authorizes the issuance of up to 250,000 shares of stock or options to
purchase stock of the Company. As of December 31, 2011, 82,000 options have been granted; 81,500 remain outstanding of which
5,625 are vested and 75,875 are not vested. During 2011, 500 options were cancelled and 8,000 options were granted. Of the
total outstanding options, 22,500 have vesting schedule A, 29,000 have vesting schedule B, and 30,000 have vesting schedule
C. Vesting schedules for the 2009 Plan are as follows:

Vesting Schedule A

Vesting Schedule B

Vesting Schedule C

25%

12 months

33%

24 months

50%

48 months

50%

24 months

67%

36 months

100%

57 months

75%

36 months

100%

48 months

100%

48 months

The following is a summary of options exercised
during the years ended December 31:

2011

2010

Intrinsic

Intrinsic

Shares

Value

Shares

Value

1999 Plan Options

-

$ -

25,786

$ 15,333

2001 Plan Options

-

$ -

11,953

$ 56,448

2002 Plan Options

-

$ -

1,000

$ 2,630

2007 Plan Options

4,000

$ 9,750

38,250

$ 108,215

F-26

The following is a summary of the activity
in the Company’s stock option plans and other options for the years ended December 31, 2011 and 2010, respectively:

December 31, 2011

December 31, 2010

Weighted Avg

Weighted Avg

Shares

Exercise Price

Shares

Exercise Price

Exercisable, beginning of period

110,625

$3.36

180,269

$3.03

Granted

-

-

-

-

Vested

22,250

2.97

33,000

3.42

Exercised

(4,000)

2.49

(76,989)

2.80

Cancelled

(42,250)

4.78

(25,655)

2.78

Exercisable at the end of period

86,625

$2.61

110,625

$3.36

December 31, 2011

December 31, 2010

Weighted Avg

Weighted Avg

Shares

Exercise Price

Shares

Exercise Price

Outstanding, beginning of period

202,750

$4.28

232,644

$3.04

Granted

8,000

5.96

74,000

6.19

Exercised

(4,000)

2.49

(76,989)

2.80

Cancelled

(44,250)

4.84

(26,905)

2.87

Outstanding at the end of period

162,500

$4.25

202,750

$4.61

At December 31, 2011, available options to grant were 87,500 under the 2009 Plan.

Significant option groups
remained outstanding at December 31, 2011 and related weighted average grant date fair value, remaining life and intrinsic value
information are as follows:

Options by

Options Outstanding

Options Vested

Grant Date

Shares

Wtd Avg

Remain. Life

Intrinsic Val

Shares

Wtd Avg

Remain. Life

Intrinsic Val

Dec 2005

35,000

$2.88

4.0

$

52,500

35,000

$

2.88

4.0

$

52,500

Oct 2008

2,500

$4.97

0.8

$

-

2,500

$

4.97

0.8

$

-

Nov 2008

43,500

$1.83

0.9

$

111,066

43,500

$

1.83

0.9

$

111,066

Dec 2010

73,500

$6.13

4.0

$

-

5,625

$

5.97

4.0

$

-

Jan 2011

8,000

$5.96

4.0

$

-

-

$

-

-

$

-

TOTAL

162,500

$4.25

3.1

$

163,566

86,625

$

2.61

2.3

$

163,566

Warrants

In February 2006, certain members of company
management were issued warrants, which fully vested immediately, to purchase 303,030 shares of the Company’s Common Stock
at an exercise price of $3.30 per share in consideration of their loaning the company $1,000,000. The fair value of the warrants
granted on February 1, 2006, was $443,000 which was estimated at the date of grant using the Black-Scholes pricing model. On May
28, 2010, all of these warrants were exercised in exchange for note indebtedness.

On October 1, 2008, the Company issued
warrants to purchase 20,000 shares of common stock of the Company to both John Schwan and Stephen M. Merrick exercisable at the
price of $4.80 per share (the market price of the stock on the date of the warrants) in consideration for the personal guarantees
by each of up to $2 million in principal amount of the bank debt of the Company. On May 28, 2010, Mssrs. Schwan and Merrick exercised
these warrants in exchange for outstanding indebtedness of the Company to them.

F-27

The following is a summary of the activity
of the Company’s warrants for the years ended December 2011 and 2010:

Weighted

Weighted

Avg

Avg

Dec. 31,

Exercise

Dec. 31,

Exercise

2011

Price

2010

Price

Outstanding and Exercisable, beginning of period

-

$

-

343,030

$

3.47

Granted

-

-

-

-

Exercised

-

-

(343,030)

3.47

Cancelled

-

-

-

-

Outstanding and Exercisable at the end of period

-

$

-

-

$

-

19.

Earnings Per Share

Basic earnings per share is computed by
dividing net income by the weighted average number of shares of common stock outstanding during each period.

Diluted earnings per share is computed
by dividing the net income by the weighted average number of shares of common stock and equivalents (stock options and warrants),
unless anti-dilutive, during each period.

For the three months ended December 31,
2011, 84,000 shares were anti-dilutive (not included in the determination of earnings on a diluted basis), all of which were represented
by options. For the twelve months ended December 31, 2011, 81,500 shares were anti-dilutive, all of which were represented by options.
For the three months ended December 31, 2010, there were no anti-dilutive shares. For the twelve months ended December 31, 2010,
6,228 shares were anti-dilutive, all of which were represented by options.

The Company’s operations consist
of a business segment which designs, manufactures, and distributes film products. Transfers between geographic areas were primarily
at cost plus a standard markup. The Company’s subsidiaries have assets consisting primarily of trade accounts receivable,
inventory and machinery and equipment. Sales and selected financial information by geographic area for the years ended December
31, 2011 and 2010, respectively, are:

United States

United Kingdom (UK)

Europe (Excluding UK)

Mexico

Consolidated

Year ended 12/31/11

Sales to outside customers

$ 34,657,000

$ 1,838,000

$ 376,000

$ 10,300,000

$ 47,171,000

Total Assets

$ 25,302,000

$ 734,000

$ 464,000

$ 7,116,000

$ 33,616,000

United States

United Kingdom (UK)

Europe (Excluding UK)

Mexico

Consolidated

Year ended 12/31/10

Sales to outside customers

$ 36,721,000

$ 2,387,000

$ 108,000

$ 8,532,000

$ 47,748,000

Total Assets

$ 24,711,000

$ 977,000

$ 220,000

$ 6,953,000

$ 32,861,000

21.

Contingencies

The Company is not party to any lawsuits
or claims.

F-30

Schedule II – Valuation and Qualifying Accounts:

The following is a summary of the allowance for doubtful accounts
related to accounts receivable for the years ended December 31:

2011

2010

Balance at beginning of year

$

59,000

$

57,000

Charged to expenses

21,000

8,000

Uncollectible accounts written off

(10,000)

(6,000)

Balance at end of year

$

70,000

$

59,000

The following is a summary of the allowance for excess inventory
for the years ended December 31:

2011

2010

Balance at beginning of year

$

376,000

$

342,000

Charged to expenses

8,000

42,000

Obsolete inventory written off

(8,000)

Balance at end of year

$

384,000

$

376,000

The following is a summary of property
and equipment and the related accounts of accumulated depreciation for the years ended December 31:

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